A combination of the surge in Tesla’s shares and the continued underperformance of value investing style are some of the reasons why James Clunie’s Jupiter Absolute Return fund made such a heavy loss in January. 
The £802.6m Jupiter Absolute Return fund has handed investors some lacklustre performance in recent years, posting negative total returns across 2019, 2018 and 2017.
The new year didn’t get off to a better start as the fund made a loss of 7.67 per cent in January, which its manager – who has run the portfolio since September 2013 – acknowledged was its “largest one-month loss since inception”.
During January, the coronavirus outbreak in China prompted a difficult month for investors, where growth-sensitive commodities such as oil and copper – and the stocks exposure to them – fell in value while safe havens such as government bonds and gold did well.
Performance of Jupiter Absolute Return vs sector and indices during Jan 2020
Source: FE Analytics
Clunie (pictured) conceded that this backdrop was “tough” for the fund and explained that its heavy losses were down to a combination of factors.
Jupiter Absolute Return is short growth stocks, which have enjoyed an extended run since the end of the financial crisis, and long the value style, which has tended to underperform.
Although global equities struggled in January, the MSCI World Growth index made a positive return of 2.2 per cent over the month while the MSCI World Value index fell 2.4 per cent. This spread accounted for a loss of around 3.8 per cent for the portfolio.
Meanwhile, most of Jupiter Absolute Return’s long positions are in “cheap” markets such as the UK, Japan and Russia while it tends to be short the “expensive” US market. Last month, the performance gap between the NASDAQ and the FTSE 100 was about 5.9 per cent in the favour of the US index.
While the fund’s style and country risk exposures go some way to explaining its underperformance in January, a big hit came from “idiosyncratic losses caused by specific glamour surges” - especially its short position in American electric vehicle and clean energy company Tesla.
Performance of Tesla in Jan 2020
Source: FE Analytics
As can be seen from the chart above, Tesla – which is headed up by the larger-than-life engineer and technology entrepreneur Elon Musk – saw its share price rocket last month.
“Tesla alone detracted close to 2.5 per cent from performance, while Wayfair, Transdigm and Shake Shack were other notable detractors. In our view, these are risky, levered, fragile and sometimes highly acquisitive companies, whose fundamentals have been deteriorating in recent years,” said Clunie, who specialises in single-stock short-selling.
“The share price moves in the past few months of these companies, and more specifically in January, are hard to explain in terms of fundamentals and are probably simply due to the sharpest increase of liquidity from the Federal Reserve in 50 years.
“When analysing Tesla, we need to make a series of extremely aggressive assumptions about revenue growth and margins to explain its eye-watering share price. Under almost all sensible, or even aggressive, scenarios that we can imagine, the current market cap does seem extraordinary and completely dislocated from the actual performance of this business.”
However, the manager added that he been “actively managing” the size of his shorts on these stocks over recent months.
When a stock that the fund is shorting experiences a strong rally, his first step is to consider whether the rationale of being short is still in place and if it is not, then the short will be eliminated.
Even if the shorting thesis remains intact, if the stock has risen significantly and the positive size becomes too large a part of the fund’s total risk then he could need to cut the position size regardless of fundamentals to minimise future losses.
“This has happened with a series of US glamour stocks in the past few months (eg. Wayfair, Shake Shack, Transdigm, Tesla),” he said.
“The shorting ‘theses’ remain intact on these stocks – the long-term evidence suggests that ‘glamour stocks’ underperform the market – but the share price spikes of these stocks have damaged performance and need risk management.”
Last year, Clunie highlighted the four lessons that he has learnt about shorts selling during his career.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Over the past three years, Jupiter Absolute Return has made a 19.08 per cent loss compared with a 5.22 per cent rise from its average peer in the IA Targeted Absolute Return sector.
However, the fund does have its fans, being a member of the FE Investments Approved List and holding a ‘A’ rating from Square Mile Investment Consulting & Research.
Simon Evan-Cook, who runs multi-manager portfolios in Premier Miton Investors’ multi-asset team, last year highlighted the fund as one that could return to outperformance if market conditions undergo a radical shift.
“The fund’s positioning is counter to what is popular and what is expensive currently – we would expect it to do well if the world shifted 180 degrees,” the multi-manager told Trustnet.
Jupiter Absolute Return has an ongoing charges figure (OCF) of 0.85 per cent.