Jupiter Absolute Return Fund (GB00B5129B32) got off to a rocky start after its launch in 2009, despite having star manager Philip Gibbs at the helm. However, last year Mr Gibbs announced his retirement and since September the fund has been run by James Clunie, who joined from SWIP.
Dr Clunie has built up a reputation as a 'shorting guru' due to his success on funds such as SWIP UK Flexible Strategy (GB00B1265J60). Absolute return funds have largely disappointed over the past few years, but this was one of the few that did what it said on the can.
"I am doing what I was doing at SWIP, but with more of a global equity focus," says Dr Clunie. "I can also use other assets and I will do that when I think there is a major dislocation in markets. The big risk is a global deflationary shock: in such a situation value stocks would suffer financial distress. I am long value stocks and short overvalued ones. I think that recently the risk of deflation has been increasing, so I have started to hedge a little with US medium-dated bonds, gold and a gold mining share."
These hedges account for less than 2 per cent of assets which before were in cash. "If I am not sure about something I don't do it, rather I hold cash," he explains. "Cash won't lose you money and it gives you the option of moving quickly when you do see an opportunity. With inflation, over the long term it is not sensible, but short term it is the easiest hedge.
"I am seeking to deploy it and would have hoped to spend more of it by now. But much as I would like to deploy it, I do not want to be in second or third rate ideas."
He has slightly added to emerging markets. "The outlook is better long term, but the scope to lose money in the short term has heightened," says Dr Clunie. "I have only been slightly adding because there could be more downside to come."
Dr Clunie's other big fear is inflation. "You can't position for both inflation and deflation," he says. "Cash is a good tool but sub optimal, especially after fund expenses. Being net long equities should add some value and they have made some positive returns. I could have reduced equities, or do what I did - add in deflationary hedges."
He doesn't make big macroeconomic predictions, but tries to structure the fund in such a way that it can cope with a range of different outcomes.
Going short
Jupiter Absolute Return's portfolio is around 7 per cent short.
"If I think an asset is over-priced, I short it," he says."Short positions have been in companies that appear over-valued under most scenarios, but show a clear catalyst for market valuations to fall in the near term."
His recent shorts have been good quality firms with strong balance sheets such as Diageo (DGE), SABMiller (SAB) and Paris-listed Kering.
"These are well loved companies and have done well over the last few years," he says. "They have benefited from emerging markets growth but this is cyclical. They are not the permanent growth stocks they were priced to be. They are good quality firms but some of them have 25 times price-earnings ratios (PEs) with downgrades. You could easily see some of them falling to 18 times or 16 times."
Dr Clunie has taken profits on SABMiller. "This is a quality firm and would never fall to half its price. If I make 10 to 20 per cent from a short, I take it."
But until there is a catalyst, he doesn't short. This can be a number of things, examples being an earnings downgrade, a company's peer issuing a profit warning or a problem with the balance sheet.
"When I spot an over-priced share, I wait," he adds. "Only short if you know why it will go down."
In terms of determining whether a share is over-valued, he looks at a series of quantitative scores such as return on equity and asset growth.
For his long positions book he has focused on out-of-fashion stocks with sound fundamentals and solid dividends, and these include big oil companies such as BP (BP.), the fund's largest holding accounting for 3.1 per cent of assets, and Norway's Statoil.
"These are large and liquid stocks but have experienced earnings downgrades for some time now," he says. "Their large capital expenditure and projects have disappointed, but their managements may be more careful about projects in the future. There could be an improvement, and slightly better returns and investment sentiment. Statoil now has better capital allocation on projects and has cut costs. It is also shareholder-friendly."
Royal Dutch Shell (RDSA), meanwhile, accounts for 3.1 per cent of assets.
He also holds insurers. Top five long positions include Esure (ESUR), 2 per cent of assets, and he also has Dutch insurer Delta Lloyd. "But I have been taking some profits, for example, in FTSE 250 specialist insurer Beazley (BEZ)."
