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Shorting specialist Clunie forecasts heightened ‘fragility’

Shorting specialist Clunie forecasts heightened ‘fragility’

Jupiter’s James Clunie is adopting a ‘lean against’ strategy in his absolute return fund as he prepares for a period of heightened volatility and fragility caused by unrealistic market bets.

In his New Year note, Clunie said the market is showing signs of overheating in several areas, encompassing cryptocurrencies, the art world and traditional assets.

‘There are other tell-tale signs that risks might be building in markets: the speculative fervour surrounding Bitcoin, for example, and recent excesses in the art market where a painting sold for $450 million, which may or may not have been produced by Leonardo da Vinci.

‘However, what is unique to this late-cycle phase is that “greed” has been a bit player to a character created by years of central bank liquidity: need. For years, pension funds have been forced to find bond-like assets against which they can match long-term liabilities.

‘Similarly, ETFs and index funds have been forced buyers of assets regardless of price as investors have poured into those funds. In my view, “need” seems to be what’s driving a lot of behaviour.’

Fragile needs

Clunie, who is Citywire + rated, said ‘need’-based trades create a real sense of fragility, as they have implications for how central banks operate and the market's over-dependence on such accommodative policies.

‘With the US Federal Reserve and central banks in the UK and Europe starting to withdraw support after years of quantitative easing and low interest rates, it seems that it is only a matter of time before some of these fragilities come to the fore.

‘While we can’t predict a change in market regime, we believe it is important to be open-minded to the possibility that one might be due. Betting against a late-cycle market is inherently painful due to the excesses that are often produced, with share prices potentially reflecting unreasonable expectations.’

Therefore, Clunie’s ‘lean against’ strategy is defined by taking most position sizes and increasing them incrementally over time.

‘We find that this can help us avoid under and overreacting to change and means that we continually recheck our original thinking about a position, carefully weighing up the value of new and old information.

‘We believe that a move towards greater risk awareness by other participants in markets would likely benefit our strategy.’

On a one-year basis, the Jupiter JGF Absolute Return fund is under-performing its average peer in the Equity – Long/Short sector. It has lost 2.7% in euro terms while the average of the 185 active funds returned 5.5% over the same period to the end of November 2017.

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