Lipper’s Jake Moeller presents highlights of a presentation by James Clunie, Fund Manager, Jupiter Absolute Return Fund, on June 19, 2014.
It is unlikely you could find two more different fund houses than Swip and Jupiter. Swip managed a significant internal book of life company balance sheet assets and was undergoing significant transition away from active equities before its takeover by Aberdeen. Jupiter, on the other hand, with its strong retail focus, has been highly committed to active fund management, with a suite of high-profile and independently minded managers.
Cultural fit is a crucial consideration in the analysis of a fund manager. Mr. Clunie—with a quiet, considered, and highly academic background—seems quite at home in Jupiter’s broad church. Whereas Swip had considerable team-based structure—with a high degree of cross-reliance, there is little of that at Jupiter. Mr. Clunie admits that the cultural change was considerable but points out that there are no silos in his new house, despite 35 highly autonomous fund managers going about their business. “As a global equity long/short manager, I have more excuse to talk to anybody in the office.” He enjoys Jupiter’s intellectual ferment—exchanging ideas, for example, on how examining the analysis of earnings manipulations can supplement the view of a stock or how his shorting of stocks other Jupiter managers hold long can create a two-way challenge to an existing thesis.
Jupiter Absolute Return Fund has a 3m Sterling Libor benchmark, and the stated fund objective is to generate absolute return over a three-year rolling period. The IMA Targeted Absolute Return sector, in which the fund sits, is highly heterogeneous, with funds composed of corporate bonds, equity long/short, equity longs with index shorts, diversified multi-asset funds such as Standard Life Gars, and multi-asset long-only funds such as Newton Real Return. This makes comparisons difficult. Mr. Clunie recommends investors seeking absolute-return solutions look closely at “where the manager has an edge,” not just choose a fund on its short-term track record, its name or its sector classification.
Table 1. Performance of Jupiter Absolute Return Fund from Mr Clunie's Tenure
Source: Lipper for Investment Management.
Mr. Clunie’s edge is short-selling of stocks, predominantly in the U.K. market. His strategy is to wait for a catalyst, such as an earnings downgrade in conjunction with a high PE, rather than simply to short an overpriced stock. He spends considerable time examining data about other short sellers, stock lending, borrowing fees, the composition of the share register (is there concentrated institutional ownership, family ownership, or hedge fund involvement?), and whether a short position may be crowded (he uses a days-to-cover ratio to examine this ). His long positions are typically bigger than his short positions. His biggest long has been plus 5% and short minus 3%, but plus 3% to minus 1.5% is more typical. (This is to prevent shorts creating illiquidity if they go wrong [i.e., rise], forcing Mr. Clunie to cover the stock.) Currently, he has 30 shorts, many around minus 0.3%, but these positions are ready to be increased when the market picks up momentum.
Aside from the additional work on the short side, his analytical toolkit is the same for longs and shorts. There is an initial screening process with 20 quant screens (each 5% equally weighted) examining value, quality, momentum, balance sheet, and earnings. These include the M-Score to look at manipulation of earnings and the Piotroski Score to summarise the accounting metrics. Stocks that screen well (or poorly for shorts) are then subjected to further traditional fundamental analysis before being included in the portfolio.
Another key point for Mr. Clunie in addressing the broad nature of the Targeted Absolute Return Sector is to manage clients’ return expectations. He believes 6% pa is a reasonable expectation of what he can achieve for investors:
He has achieved more (10% while at Swip) but is very conscious of potential drawdown. His worst month was minus 6.9% for April 2010, when the markets fell just over 20%. He is, therefore, constantly examining potential drawdown scenarios. His biggest concern at the moment is a global deflationary shock. If say, China devalues the RMB 15% to become more competitive, he has calculated a potential loss of 7.5% to the fund if his beta, factor bets, and shorts move against him. He therefore closely monitors the “canaries in the coalmine” of China’s currency and the Eurozone CPI. He uses T-Bonds and gold to create a natural deflationary hedge in the portfolio and is currently 6% bonds and 1% gold.
Mr. Clunie took over the Jupiter Absolute Return Fund from Philip Gibbs on September 1, 2013. At that point the portfolio consisted of a 3% holding in a Barclays bank bond and 97% cash. Currently, the portfolio is 70% gross and 29% net equity. Mr. Clunie is prepared to take the gross higher when he sees a “sharp dislocation” in the market. He is 45% long equities (52 stocks)—particularly liking petroleum, which he sees benefiting over increasing capital discipline, and he is minus 15% short equity in “quality” stocks such as Diageo that are characterised by high PEs with earnings downgrades and revenue shocks. Despite that his old Swip and new Jupiter fund have the same mandate (global multi-asset long/short), his Swip fund was 85% U.K., 15% international. At Jupiter it is 60% U.K. and 40% international, reflecting a desire to expand his stock universe.
Table 2. Risk/ Return Characteristics of Jupiter Absolute Return Fund within IMA Classification (since Mr Clunie's Tenure).
Source: Lipper for Investment Management.
Mr. Clunie’s brief at Jupiter is simple—to keep on doing what he’s been doing, taking the appropriate degree of risk with confidence and gather assets. At Jupiter he appears to have found an environment where his talents and academic disposition are being cultivated and supported. The addition of a highly qualified analyst in late July 2014 and the elimination of the distractions of project committees and complex fund interdependences mean his dedication and accountability to this single product is indeed “absolute.”