My colleague, Simon Cawkwell, writing in his Evil Diaries, recently described Tesla (NASDAQ:TSLA) as “surely…..the greatest short in the history of the world’s stock markets”, which is a pretty dramatic statement for someone so adept at spotting shorting opportunities.
Investors – as distinct from spread betters – would not normally be able to benefit from these sorts of potentially lucrative trades, but in this case all you would need to do is to buy the Jupiter Absolute Return fund. Its manager, James Clunie, has Tesla as his biggest short and has put together an almost market-neutral portfolio with the aim of generating steady returns in all conditions.
At the end of March, the £1,458 million fund had a total of 95 long holdings and 137 shorts with a net combined market exposure of just 2.9%. It is positioned so that it is ready for the end of the bull market and has endured a dull few years with a five-year return of 14.1%.
The long book is really diversified with the 10 largest holdings accounting for just 15.5% of the assets. These include out-of-favour stocks like BP, Centrica and Sberbank, with the largest position being the 3.1% investment in a physical gold ETF.
There is no disclosure of the individual short positions other than the fact that the electric car company Tesla is the biggest. Clunie says that it is the classic example of a ‘glamour stock’ where stories about its plans to revolutionise the car and energy market come up against the hard reality of how much cash it is going to need and how much it is really worth.
He sees lots of negatives for the stock, including poor cash flow, a weak balance sheet, the need to raise new capital, lots of competition and the fact that it is struggling to meet its production targets. Of course, if it succeeds its share price would continue to appreciate and the short position would make a loss.
It is volatile and falling markets when the fund should really be able to deliver. In fact Clunie has recently said that it has an inverse correlation to markets and that if the market fell by 20% he would expect the fund to rise by 4%.
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He has identified a range of indicators of potential market stress. These include: liquidity measures, turbulence indices, and bubbles on the fringes, with some of these apparently giving some interesting signals.
In order to take advantage of this potential change in the markets the fund has taken a couple of huge contrarian positions: it is long value stocks – which have underperformed – and short growth, while also being long in the UK (which has lagged behind other markets) and short the US.
Clunie will adjust these positions as events unfold, and in order to protect the fund has put in place a number of hedges to guard against ‘bad scenarios’, with one example being a market melt-up as the final stage of the bull market.
Jupiter Absolute Return has had a dull few years, but if you expect the growth-led bull market and stocks like Tesla to experience a sharp reversal then it could turn out to be a valuable holding.