‘I bet against Tesla – the story doesn’t match re­al­ity’

The Daily Telegraph - Your Money - - FRONT PAGE -

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’

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