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Short-selling guru making money in all market conditions
Thursday 20 Oct 2016 Author: James Crux

Wild swings in stock markets can provoke panic, though it is important to remember volatility also provides opportunities for investors to make profits.

One way of positioning portfolios for an uncertain investing climate ahead is to put money to work with ‘absolute return’ funds. These seek to make positive returns regardless of underlying market conditions.

Absolute return strategies provide an alternative prospect to traditional equity and bond funds as they can use a variety of instruments across different asset classes as well as a blend of short and long stock positions to generate positive returns from falling or rising markets.

Funds table1

Absolute star turn

Successful absolute return investing should generate returns with low correlation to the wider market, while limiting the impact of volatility by managing downside risk.

A proven exponent is the Jupiter Absolute Return Fund (GB00B5129B32), a long/short global fund that utilises manager James Clunie’s recognised specialisation and edge in single-stock short-selling. The highly diversified portfolio seeks to generate absolute return over a three year rolling period.

Since taking over Jupiter Absolute Return in September 2013, Clunie, who bought his first shares at the age of 13, has successfully pursued a lxong/short equity strategy that has sought ‘value-out of fashion’ long positions and ‘over-priced, with a catalyst’ shorts.

Clunie has conducted academic research on short selling which gives him an edge when it comes to understanding the informational value of stock lending and short-selling data. Working with a tight-knit team, Clunie applies a combination of quantitative and fundamental analysis of short positions which can make the fund more robust to shocks.

‘I’ve read everything on the topic and written on the topic and we practise it every day,’ says Clunie, adding that ‘we combine appropriate behaviour with a data edge’.

Supported by analyst Ivan Kralj, Clunie believes his edge in single-stock short-selling comes from his understanding of stock-lending datasets and his adherence to two important behaviours. The first is being patient.

Once an overpriced asset has been identified, he argues short-sellers shouldn’t ‘strike too early’. It is better to wait until you see others shorting, or wait for a catalyst, as ‘then you have an overpriced asset with a reason to go down’. The second behaviour is that ‘you must accept your mistakes and take your losses’ – with short selling you ‘can lose a lot more than all your money in theory’, though in practice you’ll be stopped out with a large loss.

A bottom-up investor who makes use of quantitative screens to identify potential long and short stock ideas, Clunie’s short positions have to be taken via derivatives in line with UCITs rules. Clunie also tries to understand the ecology of the ownership and short interest in each stock to gauge whether or not there are potentially informed traders holding opposing views to his own.

Funds table2

Netflix – A turn off?

Among Clunie’s shorts is American video-streaming company Netflix (NFLX:NDQ), famed for political drama House of Cards. With unlimited, commercial-free viewing for a low and flat subscription fee, Netflix has been able to rapidly grow its subscriber base.

However, as Kralj writes on the Jupiter site: ‘while Netflix might be creating an army of happy customers, it does not seem to be creating sustainable wealth for its shareholders in the process.’ The managers argue a ‘rather offensive US $43.13bn cap might suggest otherwise’ and given an eye-watering PE of 319.31, according to Morningstar, ‘you would expect the company to be operating a highly profitable, wide-moat business with no contenders for the throne. That is not the case, so we are bearish and short.’

Reed Hastings, the charismatic founder and CEO, readily admits that the number of players trying to eat Netflix’s lunch is significant. Amazon (AMZN:NDQ) in particular, with its Prime Video service, is ramping up its content offering and, thanks to an equally attractive price for customers, is growing membership numbers at a faster rate than Netflix.

Funds chart

Big Shorts

Jupiter Absolute Return is also short Nexstar Broadcasting (NXST:NDQ), a $1.74bn cap broadcaster and digital media play which ‘buys TV stations in America on borrowed money’ according to Clunie. ‘To us, it looks expensive, it is highly levered and has a negative catalyst in terms of big earnings downgrades which are coming through. And yet the shares are bobbing around at all-time highs,’ he says

Tesla Motors (TSLA:NDQ) is possibly the riskiest share that we are short right now,’ adds Clunie. ‘It is obvious to many investors that Tesla is an ugly stock, but there are lots of believers in the Elon Musk vision,’ he explains, referring to the billionaire SpaceX founder who drives the electric automaker’s fortunes. ‘It is beautifully ugly – it is a whole panel of red lights on a quant,’ says Clunie, whose bearish stance reflects cash concerns, an inflated valuation and poor corporate governance.

The latter manifests itself in Tesla’s proposed merger with SolarCity (SCTY:OQ), the renewable energy seller chaired by Musk, its biggest shareholder, and run by his cousins Lyndon and Peter Rive. Clunie is in good company; New York short-seller Jim Chanos, who famously predicted Enron’s collapse, is also betting against Tesla’s stock.

Long positions

Jupiter Absolute Return’s current long positions include litigation funder Burford Capital (BUR:AIM), oil major BP (BP.) and the home, car and travel insurer Esure (ESUR), as well as Denmark’s AP Moller-Maersk (MAERSKB:CO), the world’s largest container shipping group.

‘We’re buying it because it is the highest quality company in its space,’ says Clunie who notes the financial muscle to swallow up struggling competitors in an industry heading for further consolidation.


James Clunie

Manager, Jupiter Absolute Return Fund

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