Jupiter: The growing opportunities in short-selling

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Jupiter Asset Management fund manager James Clunie says overpriced assets are providing some of the best opportunity sets in the market currently for investors.

Talking to Professional Pensions editor-in-chief Jonathan Stapleton as part of a new video series, Clunie (pictured) - manager of Jupiter's absolute return strategies - said it was increasingly difficult to find good long positons at the moment, noting that long bull runs in bond, equity and other markets meant that many assets looked expensive.

He explained: "Finding loads of cheap assets that are just bountifully waiting to be selected is very hard when asset prices as a whole are so elevated."

Indeed, Clunie said his team could find only a limited number of assets of interest - with these tending to be "slightly out of fashion stocks", such as BP, Deutsche Börse, Rio Tinto or A.P. Moller - Maersk.

He explained: "These are firms where there have been problems over the past five years and the shares are somewhat depressed, perhaps a little bit cheaper than their long term fair value, but the companies are a reasonable quality, unlikely to go bust and are ok as investments."


Yet, despite the lack of long opportunities, Clunie believes there are a significant number of opportunities on the short side.

He said: "Most of our shorts are in the US at the moment, which we think is one of the markets with the highest degree of over-valuation, and we can find whole series of stocks there that have aggressive accounting, vulnerable balance sheets, slowing revenues and earnings downgrades, lots of issues."

Clunie said a good class of stocks to be short of is the food companies, noting his strategies hold short positions in firms like the Campbell Soup Company, J. M. Smucker and General Mills - saying he thinks they are not only overpriced but are pricing in "ambitious" and "unrealistic" long-term implied margins, combined with static or slowing revenue growth.

He explained: "We see a catalyst for them to go down - this deceleration of sales growth - and yet we see overvaluation. So overpriced, with a reason to go down now." 

Slow catalysts

Yet, while Clunie said he believes he can find a lot of overpriced stocks, many with catalysts to go down, he explained that many of them will not see price falls.

He said: "It is quite interesting. Normally, when you find an overpriced asset with a catalyst, it falls quite quickly, usually within three to six months. But a lot of the stocks we identify as good short ideas have been hanging in there for one to two years now, despite the reason to go down."

He added: "It is actually very difficult to be short. The best opportunity sets out there are probably on the short side, but go too early or too large and you could end up with losses and hurt your clients.

"For us, the importance is to be calm, patient, process-orientated and to try to gradually size positions so we can benefit from the eventual normalisation of market conditions."

Investment process

Clunie said Jupiter employs a three step investment process for its absolute return strategies.

This process starts with quantitative screens - identifying the factors that are relevant to the markets and then sorting through the universe to find stocks of interest, either on a long or short basis.

Next, Jupiter does a two-part fundamental analysis - first, trying to assess what the shares are probably worth using a reverse discounted cashflow model and then analysing the financial statements of the company.

Clunie said that, if a stock is still of interest, Jupiter then does what it calls "ecological analysis", which means looking at who currently owns or shorts the shares and what they might do next.

He explained: "If a stock looks good on all three of those steps, it drops into the fund as a small positive position, if it looks bad or negative on all three of those steps, it drops in as a small short position and we incrementally size those positions over time, depending on the news flow and the path of the share price."

Clunie said Jupiter then looks at this portfolio of stocks and looks at the risks in totality - assessing the exposure to the market as a whole; different styles and geographies; etc - and considers whether these should be hedged out or not.

He added: "That is how we effectively run the fund. Picking stocks, position sizing gradually and then worrying about the risks and hedging those out as necessary."

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