Simple, good and very different. That's how James Clunie describes the approach to investing he employs in running the Jupiter Absolute Return Fund, a recent addition to the Fidelity Select 50. The manager aims to deliver a positive return for investors over a rolling three-year period by investing mainly in equities.
However, it's not all one-way traffic in the manager's use of equities in the fund, as he explains: "We're different from other funds in that I'm actually net short of equities, so this fund would enjoy it if markets went down - that’s really unusual. It would also enjoy it if a number of other things went wrong in the world."
The end result of the strategy is that the fund often moves in the opposite direction to a lot of other assets - an aspect the manager believes offers investors a useful tool to balance other investments in their portfolios. But for Clunie, the diversification on offer plays second fiddle to the niche speciality the fund displays in seeking positive returns.
He explains: "I think we're good at single stock short selling - identifying stocks that are likely to fall and benefiting from that on behalf of our clients. That edge, or skill, is developed through understanding data around negative news, practices and important behaviours in short sellers that we spend years training to identify. So, simple, potentially good through our shorting and very different through our risk profile - that’s how we differentiate ourselves."
Short-selling can often generate thoughts of betting against a company an investor believes will do badly but Clunie says it's even simpler than that: "A short sale is simply an expression of a negative opinion on a share, no more than that. It could be that you're targeting bad firms where you think they are doomed to failure over time, or it could be that actually it’s a good firm that has a temporary problem. Maybe the shares are overpriced and expectations for profits or earnings are declining, or there is too much debt temporarily and they will need to issue some new shares."
So is it just the same as most investing, where investors look for share price rises, but with the opposite goal in mind?
Not quite, says Clunie, and this is where investors must tread carefully. He explains, "There are a few wrinkles, the first being risk - there’s no limit to how high a share price can rise so there’s no theoretical limit to how much money you can lose. That's very scary, so a lot of what we do is extra risk management. The other thing is cost - you have to borrow the shares to settle the trade and that’s done for a fee. So the cost and the risk make it a little bit more difficult than just the mirror image of buying shares and wanting them to rise."
Away from short-selling, Clunie also uses a more traditional approach within the fund, buying company shares with a view to selling when their prices head towards the top right of the page. Here, he has strict criteria he needs to see in a company before he adds it to the fund.
Clunie explains: "We look for companies with strong accounting measures, then we look at valuation and finally we look at who owns the shares and what they might do next. If a company is aligned on all three; strong quantitative measures, good valuation and strong shareholder register, we like it. When I look at our portfolio it’s full of stocks that tend to have these characteristics."
More on the Jupiter Absolute Return Fund
Long: A long position is the buying of a security with the expectation that it will rise in value (opposite of a short position)
Short: A short position is the sale of a borrowed security with the expectation that it will fall in value (opposite of a long position)
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. The fund may make increased and more complicated use of derivatives and this may result in leverage. In such situations performance may rise or fall more than it would have done otherwise. The fund may be exposed to the risk of financial loss if a counterparty used for derivative instruments subsequently defaults. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.