Jupiter's Clunie on short selling, sec lending

Jupiter's Clunie on short selling, sec lending

With some £46 billion worth of assets under management, Jupiter is among the largest fund houses not to lend out its clients' securities to earn extra income.

Despite not being a lender, the UK firm is an active borrower and many of its portfolio managers and analysts are familiar with the securities lending market.

Several of its investment funds have a long track record of using short strategies to capture additional alpha.

Jupiter’s £1.4 billion Absolute Return Fund is one of them.

The long/short vehicle has allocations to equities worldwide.

It may also put money into cash, fixed income, FX, ETFs and money market instruments and derivatives. 

“In my view, single stock short-selling is where we probably have an investment ‘edge’," James Clunie, head of strategy for the fund, told Global Investor. 

Short selling

Jupiter’s Absolute Return Fund has a three year cumulative return of 9.7%. Clunie estimates that short-selling ‘alpha’ has averaged around 3% per year over that time.

The strategist arrived at Jupiter in 2013 from Scottish Widows Investment Partnership where he was an investment director of equities managing both long-only and long/short equity portfolios.

Near the end of his time at Scottish Widows he published two books - ‘Predatory Trading and Crowded Exits’ and ‘Short-selling’.

“The books built on some of the topics I had researched around single stock short-selling.

“Short selling is costly and risky, so most market participants don’t do it. But some folk do short-sell. Why do they bear the cost and risk of shorting? Probably because they are ‘well informed’ and want to express a negative opinion. If you had data showing you the activities of these short-sellers, this could reveal useful information ”

The key at Jupiter, according to Clunie, is making use of the information available.

“We’ve been buying securities lending data for years and feel that we understand it,” he added. “We’re also patient before short-selling, awaiting catalysts, and we accept mistakes on short positions when we make them.

“We’ve been slightly net short of equities for much of the last three years, so, if I’m honest, we breathed a sigh of relief when volatility returned to the equity markets this year,” Clunie admitted.

“Tesla is still our largest short position, a position which has been supported by this week’s increasingly negative news flow.”

Tesla’s boss, Elon Musk, had a contentious conference call with analysts after the company’s earnings announcement on Wednesday which sent shares of the US electric car maker sharply lower.

Clunie is continuing to focus on the US for other short opportunities.

“We can find examples of seemingly over-priced shares, excess hope and aggressive accounting choices in a range of companies and sectors in the US,” he said.

In the UK, the Brexit vote in 2016 saw the Absolute Return Fund post a strong performance with stocks falling in the immediate aftermath of the UK’s decision to leave the EU. The fund’s long and short stock selection within the UK was helpful at that time.

Clunie didn’t profit from the recent collapse of outsourcing giant Carillion, although he had been shorting the stock seven years ago at SWIP.

“We had been shorting Carillion. We waited and waited, the price wobbled but ultimately stayed the same back then. It became a crowded trade and we couldn’t bear the wait. A missed opportunity given what has happened in the past year.”

Securities lending

Jupiter makes use of stock loan data from the likes of IHS Markit, a well-known vendor in the securities finance space.

Clunie also says he keeps in close contact with lending agents, despite the fact Jupiter’s funds don’t currently engage in securities lending.

“Personally, I’d like to take another look at securities lending,” Clunie said. “We’re confident of our long positions and securities lending is a way to earn extra income for our fund investors.

“Secondly, if one of our holdings is in demand on the short side, extra colour and knowledge from our own lending programme could be valuable.”

The strategist also reckons that stock lending needn’t be too risky, particularly for those who understand the risks associated with collateral re-investment. Transparency, he suggests, could still be improved.

He also has noticed the peer-to-peer platforms emerging in the market.

“They won’t be for everyone, if you’re operationally weak, you need someone in the middle with securities lending experience. If you’re operationally competent, perhaps you can explore other options.”

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