Elections in the UK, France and Germany, and nearly four years of a Trump US presidency mean only one thing for investors: uncertainty, and at times market volatility. If you want to dampen this volatility and mitigate downside risk, you will need to hold investments that can help achieve this, alongside your higher risk and return holdings.
- Consistent positive returns
- Experienced manager
- Low correlation to other asset classes
- Reasonable ongoing charge
- Lags behind in rising markets
Absolute-return funds have received a bad press as a number have failed to deliver what they promise and in some cases have high charges. However, some have successfully mitigated downside risk and at a reasonable cost - and one of these is Jupiter Absolute Return (GB00B6Q84T67).
This fund has been run since 2013 by James Clunie, a specialist in 'short selling' - taking a bet on the prices of assets falling. Doing this means the fund has a particularly low correlation with other asset classes.
"It is rare to find a fund with such low historic correlation to other asset classes, even in the absolute-return space, which may make Jupiter Absolute Return an effective diversifier and a good complementary portfolio holding," say analysts at research company FundCalibre. "James has a good track record in short selling and the fund has performed consistently under his management."
The fund has made positive returns and beaten its benchmark, Libor GBP 3 Months, in 2013, 2015 and 2016. The fund has also made positive cumulative returns over one, three and five years.
And Dr Clunie has run such a strategy longer than he has run this fund: before joining Jupiter he ran SWIP UK Flexible Strategy Fund - an IC Tip in 2013. This fund delivered a positive return in each of the four calendar years before that, as well as beating three-month Libor.
Jupiter Absolute Return invests primarily in global equities with the aim of generating a positive return in rising and falling markets, typically with a slight bias to value stocks. It seeks to generate an absolute return over a three-year rolling period, independent of market conditions.
The fund's management team screens stocks over three different time horizons to determine their fair value, and whether they are trading above or below that. They might invest in a stock if it looks fair or undervalued, or short it if it looks overvalued. But they won't short a stock just because they think it has a high valuation - there also needs to be a potential price drop catalyst.
This approach is coupled with fundamental analysis, typically a reverse discounted cash flow analysis to understand what expectations for operating margins and return on invested capital are embedded into share prices. This also helps to determine if a stock is under- or overvalued.
But the fund's management team does not try to predict the decisions of politicians or central bankers - rather it prepares for several different scenarios and considers how the fund might react in each case.
Wealth preservation funds can have high charges and in some cases performance fees. And short selling can be detrimental to returns if the wrong call is made, and mean negative returns in rising markets. The fund's defensive nature and focus on capital protection also means it will often underperform in rising markets.
However, Jupiter Absolute Return has a reasonable charge of 0.86 per cent and doesn't have a performance fee. And its managers do not invest more than 5 per cent of its assets in one stock or take a larger short position than 3 per cent. "This helps to mitigate the negative impact of any stock price falls on the fund's overall returns," explain analysts at FundCalibre.
Risk management is achieved through diversification, with consideration of market capitalisation and liquidity, while the valuation discipline with long and short positions also helps to mitigate risk.
And this fund doesn't aim to outperform in rising markets - it is a lower volatility complement to higher risk/return funds.
So, if you want a proven way to dampen volatility in your portfolio for a reasonable price, then Jupiter Absolute Return still looks like a good way to do this. Buy.
JUPITER ABSOLUTE RETURN (GB00B6Q84T67) | |||
---|---|---|---|
PRICE: | 56.88p | MEAN RETURN: | 4.79% |
IA SECTOR: | Targeted Absolute Return | SHARPE RATIO: | 0.72 |
FUND SIZE: | £1bn | STANDARD DEVIATION: | 5.93% |
SET-UP DATE: | 14/12/09* | ONGOING CHARGE: | 0.86% |
MANAGER START DATE: | 1 September 2013 | YIELD: | 0.00% |
LONG HOLDINGS: | 84* | FUND TYPE: | Unit trust |
SHORT HOLDINGS: | 116* | MORE DETAILS: | jupiteram.com |
Source: Morningstar, *Jupiter
Cumulative performance
1-year total return (%) | 3-year total return (%) | 5-year total return (%) | |
---|---|---|---|
Jupiter Absolute Return | 3.14 | 14.71 | 17.41 |
MSCI World index | 30.20 | 54.31 | 101.48 |
FTSE All-Share index | 20.14 | 21.32 | 56.71 |
Source: Morningstar, as at 1 May 2017
Annual returns
2016 | 2015 | 2014 | 2013 | 2012 | |
---|---|---|---|---|---|
Jupiter Absolute Return | 10.23 | 5.93 | -0.22 | 2.21 | 0.92 |
MSCI World index | 28.24 | 4.87 | 11.46 | 24.32 | 10.74 |
FTSE All-Share index | 16.75 | 0.98 | 1.18 | 20.81 | 12.3 |
Source: Morningstar, as at 1 May 2017
SWIP UK Flexible Strategy Fund performance to 22 March 2013
1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | |
---|---|---|---|
SWIP UK Flexible Strategy Fund | 12.4 | 26.32 | 29.23 |
BBA Libor 3 Month GBP | 0.85 | 2.47 | 9.88 |
Morningstar Europe OE Alt - Long/Short Equity - UK sector average | 8.1 | 11.7 | 40.31 |
Source: Morningstar, as at 22 March 2013
Jupiter Absolute Return top 10 holdings, as at 31 March 2017
Physical Gold ETF | 2.2 |
BP | 1.9 |
Burford Capital | 1.6 |
Centrica | 1.4 |
Rio Tinto | 1.0 |
Statoil | 0.9 |
Esure | 0.9 |
Sberbank | 0.9 |
Cameco Corp | 0.9 |
AP Moeller-Maersk | 0.8 |
IC TIP RATING
Tip style: GROWTH
Risk rating: MEDIUM
Timescale: LONG TERM