OMGI’s Kerr laments lack of stocks to short

OMGI’s Kerr laments lack of stocks to short

Old Mutual Global Investors’ Luke Kerr has added his voice to the ranks of UK equity long/short managers who say they are struggling to find stocks to short in the current environment.

Mr Kerr, who runs the £322m Old Mutual UK Dynamic Equity fund, has just six short positions in his portfolio and is struggling to find more companies to bet against, in spite of UK equity indices remaining near record highs.

“I feel markets are quite oversold and fear is high,” he explained.

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“We are somewhere near the bottom of the market and I don’t want to get caught with shorts.”

The manager added that his short book positions are “small and eclectic”, involving companies such as food producers.

Nor has Mr Kerr yet found a greater pool of opportunities for his long book.

Accordingly, the manager’s cash level stood at 7 per cent of his fund at the start of September.

This elevated level is a result of selling out of stocks throughout the summer and Mr Kerr’s desire to await a “catalyst” for positive change.

He said: “I’m very conscious that areas of the market are very oversold and very unloved.

“There are normally some year-end rallies. So sectors that have been terrible all year, such as resources and capital goods, will bounce back a little.”

But he added: “There is no indication why I would need to [invest at the moment].”

One area of the market Mr Kerr still likes is the housebuilding sector.

Some managers, such as Neptune’s Mark Martin, have been worried about the continued success of this sector and have sold out. However, Mr Kerr was maintaining his overweight as he thought there was still the “best land available” and the “best planning environment” that these companies had ever seen.

He said: “The sector is more disciplined this cycle. The focus is on returning capital rather than growing ever bigger.”

Elsewhere, the manager is underweight financials as he “can’t identify enough really strong stock ideas to get us up to a neutral state”.

Mr Kerr’s lack of viable stocks to short is reminiscent of the situation identified by Henderson UK Absolute Return fund managers Luke Newman and Ben Wallace earlier this summer.

Mr Newman told Investment Adviser in June that the rising number of mergers and acquisitions in the UK had made him more wary than usual of shorting, which he described as “high risk”.

Not all managers agree. Kames Capital’s Malcolm McPartlin, manager of the firm’s UK Equity Absolute Return fund, has identified oil services companies as particularly weak.

Mr McPartlin said his stance was not solely down to falls in the price of oil during the past 18 months.

Companies in the sector were also facing “structural pressures”, which made them candidates for shorting, he said.