Artemis manager Stephen Moore has pitted himself against expectations of improved conditions for US banks by shorting the sector.
He said his US Absolute Return fund had “got a bit shorter” in recent months as equities appeared less attractive from a risk-reward perspective.
In particular, he has been targeting sectors such as banks, which have been earmarked by some for a revival in part because of a belief the industry could benefit from rising interest rates.
“We have definitely seen more shorting opportunities as we go through the recovery in cyclical stocks,” Mr Moore said.
At the end of May, the fund had its largest short position of 1.8 per cent in financials, with three of its biggest 10 shorts in the sector.
“We are seeing lots of short opportunities in the financial sector. There’s confidence that there’s a rebound in investment banking activity. I’m not sure about that,” he explained.
“We may get a rate hike but we are not going to get a substantial increase in interest rates to justify the valuation of US financial stocks.”
In its June meeting, the US Federal Reserve kept monetary policy steady, with interest rates remaining in their target range of 0.25 to 0.5 per cent.
In a statement, the Federal Open Market Committee said it expected labour market numbers to improve, leading to “gradual adjustments in the stance of monetary policy”.
|Hidden Gems: A closer look|
The IA’s Targeted Absolute Return sector is a notoriously mixed bag, given that it houses a plethora of investment styles and strategies.
Given the deluge of fund types inhabiting the trade body’s category, talking about average returns is a moot point.
One factor the constituents do have in common is they typically aim to deliver positive returns regardless of what direction markets are going, although this is a goal that is often missed.
But our analysis, which, among other areas, looks at the Sortino ratios of the portfolios in the sector, has unearthed a trio of funds that have stood out from the crowd, namely the Artemis US Absolute Return, BlackRock European Absolute Alpha and Polar Capital Absolute UK Equity funds.
All three of our hidden gems are equity-focused and have a healthy exposure to technology and healthcare, but display differing views on other industries such as financials, where the Artemis fund is short, while BlackRock is net long.
All the funds also boast relatively fresh management teams. Vincent Devlin has been running the BlackRock vehicle since 2009 but was joined by Stefan Gries in 2013. Stephen Moore and Guy Rushton, respectively the managers of the Artemis and Polar portfolios, took over the reins of their funds in 2014.
Despite the market volatility, all three funds have kept good on their aim and delivered positive returns.
However, economic projections released by the Fed at the same time showed that, while the projected path of the federal funds rate is still expected to increase this year to 0.9 per cent, the longer term projection has fallen from 3.3 per cent to 3 per cent.
“We talk about credit issues. Rate rises can be good but they can be slowed by a deterioration in the credit environment,” Mr Moore said.
In contrast to his shorting, he said equity opportunities were rare on the long side.
The manager has only focused on a handful of long opportunities this year, including building up a 3.9 per cent position in media conglomerate Liberty Ventures and adding to a holding in technology giant Apple.
He said: “The overall opportunity set of the market is limited. Risks are mounting from a stock price perspective.
“We have seen some improvement in fundamentals in S&P 500 earnings, but it’s marginal, from very low levels. It’s fine, but it’s in a context of woeful earnings growth. We have got pretty much the slowest growth in Russell 2000 revenue and sales growth in history, which is parallel with the great recession.
“We have reduced the size of our long book as valuations have increased,” he added.
“The risk-reward ratios on a lot of stocks have deteriorated. The gross exposure has come down as we have realised opportunities.”
As part of this, the manager has taken profits on some long positions, including home and security products name Fortune Brands and building supplies business Masco, amid increased valuations.