‘I bet against Tesla – the story doesn’t match reality’
Investors who want to protect their portfolio against stock market volatility confront a difficult choice. Bonds, the traditional safe haven asset, face a number of risks after three decades of rising prices. Absolute return funds, which aim to deliver a positive return regardless of market conditions, provide one option.
The £1.4bn Jupiter Absolute Return fund, managed by James Clunie since 2013, aims to deliver a positive return over any three-year period. The fund makes heavy use of so-called “short selling” – betting against individual stocks.
Mr Clunie told Telegraph Money what makes him short a stock, when his fund should perform well and why he doesn’t buy into the hype over Tesla.
The portfolio has around 40pc in global shares, 42pc in “shorts” against global shares – mostly in America – and assets such as gold to make the fund more robust. Those percentages change gradually over time. If you’re an active manager you have to have an edge, otherwise there’s no real purpose in existing – shorting stocks is our edge. It has been my research focus for 15 years.
There’s evidence that there are certain signals that can be identified to gain an edge when choosing companies to short. We’ve read all – and written a number of – the academic papers on the topic.
We are patient, waiting to short a stock until others do too, and accept our losses if there’s news that contradicts our thinking.
If others short the company you want to bet against, they have seen what you see, and together you are more likely to succeed against a mass of optimistic buyers.
For picking both stocks to invest in and to bet against there are multiple stages. First, we screen James Clunie lunie joined Jupiter upiter in 2013. He previously sly worked at Scottish Widows Investment ent Partnership hip and Aberdeen n Asset Management. He has also been a lecturer in finance at the University of Edinburgh. accounting data, pricing data and other information on companies and plug that data into formulas that rank stocks from top to bottom.
Then we look at the market value and determine if the cash flow a company needs to sustain that share price can realistically be attained.
We then look at factors such as directors buying shares, short sellers building positions and the involvement of “activist” investors.
When companies score favourably in all these areas we invest a small amount to start with. If companies score badly we start to bet against them. We then invest more, or abandon the idea, depending on news and whether it confirms our thinking.
Right now our biggest investment is in oil giant BP. People think it’s a rubbish company, but it has been disciplined with its spending, which will show up in its results. It should increase in price once people realise it’s not as bad as they thought.
Our biggest short position is against electric car firm Tesla (see box, right).
Jupiter’s James Clunie tells James Connington why ‘short selling’ is a vital weapon in his armoury
Our fund has an inverse correlation to stock markets, which is the exact opposite of most funds.
If share prices fall, because of either rising interest rates or an economic recession, we expect the fund to go up. If the market fell by 20pc, we’d expect to be up by 4pc.
The biggest risk to the fund is that share prices keep going up. We don’t like steady markets where shares go up in a straight line, led by stocks that have already gone up a lot.
We hated 2013 to 2014 and last year, when markets rose strongly. We just hunker down and try to survive those periods.
Performance was flat in 2013 to 2014 and the fund lost around 3pc in 2017. But the insurance the fund offers hasn’t come at a big price – the fund is up by 10pc over three years and by 16pc over five years. Burford Capital, the litigation finance company, has been the best on a total return basis. Some of the worst are still playing out. For now, Tesla has lost us money as it has been going up, but we still think we’re right. It’s about 5pc of my personal wealth, similar to many clients’ weightings to the fund.
My bonus is based on performance and the amount of money in the fund. If I was unemployed, I’d still be doing this. I considered being an architect, but couldn’t handle seven years of study without entering the job market. Tesla is really interesting. It is a classic example of a “glamour” stock where tales of the company’s plans to revolutionise the car sector and energy market run up against arguments about burning through cash and the true worth of the business.
The company fits into various exciting narratives, with a product mix including electric vehicles, battery technology and solar power. The “cult” of chief executive Elon Musk is a powerful force, too: the genius who is going to take us to Mars.
These are sexy stories, but look at the fundamentals. I see lots of negatives for Tesla. It has poor cash flow, a weak balance sheet, the need to raise new capital, lots of competition coming, and it is struggling to meet production targets for its vehicles. Fundamentally, it’s a horrible stock. We have been surprised by how much Mr Musk seems able to influence market behaviour with his comments. He has a reason for wanting a high share price [although in a recent conference call he berated analysts, and the shares fell]. The business has been burning through cash at a rapid rate. Despite raising $2bn (£1.4bn) through stock issuance in 2016, and $1.2bn through stocks and bonds in March this year, some estimates say it has only enough cash to survive the next three quarters. The opposing belief is that Tesla will execute its strategy flawlessly, which then increases its share price and brings down the cost of raising funding for the business. I don’t know who will win. I’m willing to accept defeat on it one day.
www.telegraph.co.uk/funds ‘ IT’S A HORRIBLE STOCK’