Jupiter’s James Clunie admitted absolute return managers tend to be more concerned about keeping volatility low than achieving high returns, a trend which he described as a “collective mistake”.
Mr Clunie, who runs Jupiter’s £433m Absolute Return fund, said: “Many managers think the best way to achieve stable returns is to invest in really safe stocks with low volatility and high quality earnings, but if the value of that quality stock is wrong, then it’s a mistake.”
The Jupiter fund is currently net short on quality stocks, which Mr Clunie said “feels awful” because he’s short-selling the stocks everyone is writing about.
But he said a problem in the markets at the moment is people are willing to pay for certainty or near-certainty, which prompted him to go short on stocks which people are paying too much for.
“We are embracing the uncertainty, meaning we bear the pain of that uncertainty,” he said, adding however this was the “right” strategy to have as investors.
One of the big problems in the industry, Mr Clunie said, is a lot of funds invest in low-risk vehicles in a bid to avoid volatility.
The Jupiter fund, however, blends together a number of high volatility stocks which have negative correlation to other absolute return funds, and is markedly different from some of the biggest funds in the absolute return sector, such as Standard Life’s £26.4bn Global Absolute Return Strategy.
He said he “bears the pain of going against the game”, and prefers it when markets are drifting or choppy.
“But what I don’t want is a steadily rising market because it’s a difficult skill set to exploit.”
According to Mr Clunie, his fund has made absolute profits in the three years since he started by short-selling stocks.
Commenting on research from Markit, which found a sharp increase in short-sellers betting on the collapse of big household names, Mr Clunie said a lot of these shorts are “too obvious”.
“Of course big department stores that were big in the 70s are in trouble, so we go for less obvious stocks to short.
“We ask ourselves what we know that other people don’t,” he said, adding this give him a “comparative advantage”.
Mr Clunie also said having a “floppy” and “slightly contrarian” approach in the days after the EU referendum worked in the fund’s favour.
He said he predicted people would panic following the Brexit outcome and decided to do the opposite of the markets, such as buying a housebuilder and selling a gold miner.
“I know of some fund managers who were selling stocks first thing in the morning, and so I was buying what they were selling at a good price.”