Important information: 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.

The 2015 film, The Big Short, tells the story of a group of investors who bet against, or ‘short’, the US mortgage market in the run-up to the 2008 global financial crisis.

Its central theme of contrarian thinking aiming to uncover hidden value has widespread appeal, and it’s the same logic that underpins fund manager James Clunie’s investment approach.

With his Jupiter Absolute Return Fund, Clunie aims to deliver a positive return for investors over a rolling three-year period by investing mainly in equities. However, he goes short on equities far more than most other funds - in fact, he is often net short of equities, meaning that most of this portfolio bets against equity markets.

The long and short of it

Where most investors stand to profit from corporate growth, this manager’s approach rests on the expectation of market falls. Short positions in big names like Tesla, Amazon, and the tech-heavy FTSE 100 investment trust, Scottish Mortgage, which I recently wrote about, means he is pessimistic about the prospects of some of the world’s largest growth giants.

That’s not to say that Clunie only stands to profit from these businesses’ ruin. His approach often involves looking for good companies which he feels suffer from a temporary problem that will eventually negatively impact their share prices, without necessarily collapsing them.

For this reason, Clunie feels the best opportunities lie in the US equity markets, where he sees the largest excesses in valuations and the greatest fragilities in companies’ balance sheets.

Still, there aren’t many right now who are betting against Amazon - and that’s the point. Not only is Clunie short on growth stocks, he is long on value. That is to say, he looks for un-loved companies which he feels the market has undervalued. This alternative risk profile means the fund often moves in opposite directions to most other assets, which could position it as an ideal diversifier in investors’ portfolios.

A value-orientated fund could also appeal to long-term investors who are willing to endure the current market bias for growth over value, in the expectation that the tides will eventually turn back in favour of value.

Risk management

In many ways, a short investment strategy is best understood as the opposite of long investing - where the latter looks for share price rises, the former looks for losses. But short selling also involves an added element of risk which Clunie is keen to protect against.

When going long on a share, you only stand to lose the amount you invested in the first place, with no theoretical limit to the amount of money you could make. The opposite is true of shorting, where it’s the upside that is limited, and not the downside. The losses you could face are, theoretically, infinite.

Taking the requisite risk management measures is key to Clunie’s strategy, with non-equity instruments like gold ETFs and derivatives often used to hedge against these additional hazards. This means Clunie generally takes an overly defensive position, which could help to de-risk investors’ portfolios, especially when coupled with the manager’s contrarian approach to stock selection.

Clunie is more aware than most of constraints like these associated with his investment approach - his PhD was on that very subject. It’s certainly not an approach he would advise trying at home. Fortunately, investors can still get in on the action through the expertise of a manager who is just as focussed on mitigating risks as he is on delivering returns.

More on Jupiter Absolute Return Fund

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. 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.

Topics covered

Active investing; DiversificationFundsVolatility

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