Jupiter Absolute Return – fund update

This fund offers lower volatility and little correlation to equity markets – but it will not appeal to all tastes

This content is more than 6 months old now, please visit the news area of this site for more recent content

  1. Rob Morgan

Funds in the Targeted Absolute Return sector aim to produce positive returns in a variety of market conditions through using sophisticated investment techniques such as short selling (profiting when prices fall). They generally aim to make modest yet consistent gains with smoother performance than traditional funds; admirable objectives that resonate with many investors, but there are no guarantees and these investments can fall as well as rise.

The sector is a mixed bag of funds taking a variety of investment approaches and levels of risk. On the one hand there are conservative funds looking to eke out consistent but modest returns, and on the other there are more aggressive ones giving managers the ability to take on a much higher level of market risk. Clearly the latter can, at least at times, exhibit a high level of correlation to other asset classes – often equities – and these funds should perhaps be better considered as part of a well-rounded equity allocation than in the part of a portfolio that provides diversification.

One fund we believe could offer investors the potential for genuine diversification is Jupiter Absolute Return Fund managed since September 2013 by James Clunie. Overall, Mr Clunie aims to dampen the volatility of the fund to around a quarter of that of the equity market and to produce a longer term average return of 4% over and above interest rate on cash (as measured by the three-month LIBOR). The fund is likely to lag behind a rising market but aims to cushion any falls. Indeed the fund price may move in the opposite direction to the prevailing market trend.

That is especially the case right now. Mr Clunie’s approach combines traditional long positions in stocks he believes are undervalued with short positions in those he believes are overpriced where he can profit from any fall in value. Currently the portfolio is characterised by a preference for “ugly” value stocks, mainly in the UK and Japan, and shorting so-called “US-glamour” stocks, some of which are not yet profitable.

Many of the short positions have attracted notable publicity as they are internet or technology businesses that are highly cherished by many investors. Betting against the likes of Amazon, electric car maker Tesla, online retailer Wayfair and streaming service Netflix has been a considerable headwind for the fund and largely explains its lacklustre performance of the past couple of years. Mr Clunie still insists that these stocks are overpriced and fragile, susceptible to a deterioration of positive sentiment.

Backing the UK is perhaps an even more unpopular trade. Mr Clunie characterises this as taking calculated risks under conditions of uncertainty, believeing that while Brexit has caused confusion there are some very attractive opportunities to be found. Moreover, he argues that Brexit should generally not be the first test of a company’s eligibility as a potential investment, rather a secondary consideration once a firm’s overall health and prospects have been assessed. Among the fund’s UK positions are outsourcer Serco and brickmaker Forterra.

Mr Clunie summarises that his overall strategy looks “logical and sensible” but is “really painful right now” in the midst of a bull market led by growth-oriented stocks, especially those in the US. He emphasises that a classic mistake investors make is to shun ‘value’ and buy ‘growth’ but admits that it is impossible to determine when things might turn in his favour.

Although he is making bold calls at a sector and geographic level, implementation at a stock level is diverse and this has helped stem losses during a difficult period. Current short ideas total around 130 with 75 of these US listed, while long positions total about 90. The fund is slightly net short meaning that, all else being equal (with no stocks underperforming or outperforming), the fund would benefit from a falling market rather than a rising one.

Our view

This fund offers lower volatility and little correlation to equity markets – and potentially useful diversification. Yet it will not appeal to all tastes. It is especially reliant on the strategy and stock picking skill of the manager in generating positive returns, and currently it would likely fare best during a sustained period of volatility and stress in markets.

The fund is one of very few that performed well in the third quarter of 2018, which provides a taster of its potential if markets take another turn for the worse. It therefore remains worth considering by those who hold a cautious view and want to position their portfolio for a reverse of the prevailing trend of the outperformance of US growth and technology stocks. It remains part of our Foundation Fundlist, our preferred investments across the major sectors for new investment.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

More from author

  1. Rob Morgan

    Does your portfolio need a spring clean?

    Fund Research - 10th Apr 2019 09:29am

    Spring is a perfect time to take a fresh look at your investments. Rob Morgan looks a...

  2. Rob Morgan

    Investec Diversified Income – fund update

    Fund Research - 10th Apr 2019 09:29am

    Many investors want to generate consistent returns and a high income. This fund share...

  3. Rob Morgan

    Jupiter Absolute Return – fund update

    Fund Research - 10th Apr 2019 09:29am

    This fund offers lower volatility and little correlation to equity markets – but it w...

Most read articles

  1. Jupiter Absolute Return – fund update

    Does your portfolio need a spring clean?

    Fund Research - 10th Apr 2019 09:29am

    Spring is a perfect time to take a fresh look at your investments. Rob Morgan looks a...

  2. Jupiter Absolute Return – fund update

    Investec Diversified Income – fund update

    Fund Research - 10th Apr 2019 09:29am

    Many investors want to generate consistent returns and a high income. This fund share...

  3. Jupiter Absolute Return – fund update

    Jupiter Absolute Return – fund update

    Fund Research - 10th Apr 2019 09:29am

    This fund offers lower volatility and little correlation to equity markets – but it w...

Investment involves risk. You may get back less than invested.