Shorting strongly performing growth stocks like Tesla has cost James Clunie, manager of the Jupiter Absolute Return fund, his job, but should fund managers stick to their guns or be prepared to change their minds?
The Jupiter Absolute Return fund has had a terrible time of it thanks to Clunie’s strategy of going long value and short growth. With growth stocks getting ever more expensive and value stocks ever cheaper it is easy to see why he did it, yet it has been an expensive mistake.
Over the last three years it has been the worst performing of the 108 funds in the Targeted Absolute Return sector with a loss of 23.7%, which is well below its objective of generating positive absolute returns over a rolling three year period. Shorting Tesla (NASDAQ:TSLA) and Scottish Mortgage (LON:SMT), two of the year’s best performing stocks, didn’t exactly help, with assets under management shrinking from £1.2bn to £165m over the last 12 months.
On one level it highlights the challenges facing absolute return funds, especially as 20 of the constituents in the sector – almost a fifth − have lost money over the last three years. The counter argument is that if Clunie had gone long growth and short value he would have made a killing.
The value versus growth debate
It also shines a spotlight on the value versus growth debate. Growth stocks led by the technology sector have dominated over the last 10 years, with the pandemic providing further impetus as the stay at home winners gained at the expense of more traditional businesses.
This long running trend has already contributed to several other value managers losing their jobs, including Mark Barnett from Invesco Perpetual, yet there are signs that things could be about to change.
In their latest update, the managers of the Ruffer Investment Company (LON:RICA), who have included some value stocks in their multi-asset portfolio, pointed out that the arrival of the Pfizer efficacy figures for their vaccine on November ninth led to one of the most extraordinary days in stock market history.
They say that the momentum factor, a popular algorithmic trading strategy that buys the best-performing stocks, while going short of the worst-performers, fell by 24%, which was an eight standard deviation event. If the vaccine enables economies to get back to normal and inflation to pick up, then value could be back with a bang.
Damned if you do, damned if you don’t
Financial advisers are always telling private investors that it is time in the market, not timing that matters, but fund managers can’t normally afford to be so sanguine. The whole episode reminds me of a value manager I knew when I was working in the City in the 1990s who lost his job and then told me that he had been right all along but was just a year and a half too early!
Most managers tend to stick to their investment philosophy through thick and thin, and quite rightly so, as how could you invest in a fund if you can’t be sure of how your money is going to be managed? This could be why they are mainly style agnostic in the UK and prefer to concentrate on the nuts and bolts of stock selection.
It is easier to be a bit more pragmatic on your individual holdings and to accept your mistakes earlier, rather than having to ditch your whole philosophy when things go against you. Maybe this time next year it will be the growth managers who are under pressure.