Making money from falling share prices

Juliet Schooling Latter 24/05/2023 in Equities, Fixed income

We had become used to near-zero interest rates for many years, but there’s a strong sense that this era is being confined to the history books. That’s certainly the opinion of Ben Wallace and Luke Newman, the co-managers of the Janus Henderson Absolute Return fund.

And the experienced investment partnership believes this will have different ramifications for economies and businesses over the coming years. “We have seen investor appetite change and an end to the speculative spending from businesses that have characterised the past few years,” they recently wrote.

Pressure to perform

The managers pointed out how businesses have been under very little pressure to generate cash flow and profitability due to highly accommodative monetary and fiscal policy. However, a return to “higher dispersion levels” between individual securities could enable stock pickers to employ valuation techniques that have been side-lined over the past decade.

This backdrop means a dramatic change of environment for long/short investors, they argued. This could make it even more of an interesting area for them. Their approach sees the team investing in companies whose share prices are expected to rise, as well as ‘shorting’ those predicted to fall. “It has created an opportunity set that is much richer in opportunities, opening up the potential to achieve better levels of investment returns, relative to the past few years, without increasing risk and volatility,” they explained.

The Janus Henderson Absolute Return fund is a global long/short equity portfolio with a UK bias that aims to deliver absolute positive returns over rolling 12 month periods. Its target is to outperform the UK base interest rate, after charges, over any three year period. Broadly, two thirds of the portfolio is in shorter-term tactical ideas, with the remainder in core holdings.

“We have seen a potentially significant improvement in opportunities for stock pickers over the past few months,” the managers added. “Particularly for long/short investors, who can benefit from both those businesses capable of rising with the tide and those that sink with it.”

Absolute return mindset

The comments expressed by Ben and Luke suggests it’s worthwhile giving an overview of how absolute return funds are managed. The aim of these portfolios is to make money, whatever happens. When times are more challenging, therefore, such goals seem particularly attractive.

Most funds with these objectives can be found in the IA Targeted Absolute Return sector. However, it’s important to note that positive returns aren’t guaranteed. You also need to acknowledge the approaches taken by various portfolios in this sector can vary enormously. Unfortunately, this makes it impossible to easily compare rival funds. Some will focus on fixed income investments, for example, while others will embrace a wider mix of assets. That’s why each fund needs to be assessed on its own merits.

Here are three other targeted absolute funds that have an Elite Rating from FundCalibre:

European approach

A long/short approach is also employed by Stefan Gries and Stephanie Bothwell, the co-managers of the BlackRock European Absolute Alpha fund. Their objective is to achieve positive absolute returns over periods of 12 months, regardless of the prevailing market conditions.

The managers look for a mix of characteristics. For short ideas, they look at structurally challenged businesses, with limited pricing power, high leverage, and the potential to be disrupted. For long positions, they favour good management teams, an historically high return on invested capital, good free cash flow, and an ability to preserve capital through difficult cycles.

A portfolio that embraces a multi-cap approach to investing in companies in both the UK and mainland Europe is still pretty uncommon. However, its pan-European approach means there are plenty of opportunities, with a comprehensive list of long and short ideas available for consideration.

Capital protection

Another portfolio we like in the sector is the LF Ruffer Diversified Return fund, which has the protection of investor capital at the heart of its process. The fund aims not to lose money on any 12-month rolling basis, with a strong emphasis on providing genuine protection in times of market stress. The belief is that if it succeeds in protecting, then growing, the value of the fund, it should be able to outpace inflation. In the current climate, that will be music to investors’ ears.

The portfolio, which was launched in September 2021, is managed by investment directors Duncan MacInnes and Ian Rees, both of whom joined the business back in 2012. According to the most recent factsheet, the fund is invested in a wide variety of assets, including short-dated bonds, commodities, and a variety of international equities.

The managers recently emphasised how the aim was to create a portfolio that was robust to multiple future pathways. “The fine line between monetary and financial stability is central to how the portfolio is positioned today,” they wrote.

Alternative investments

Our final fund suggestion is Brooks Macdonald Defensive Capital, a defensive multi-asset fund, focusing on long-term capital growth and protection. It aims to deliver positive absolute returns over rolling three-year periods, in a range of market conditions, with less volatility than equity funds. Importantly, the fund does not invest in equities or bonds but instead in a series of alternative assets, providing genuine diversification to portfolios.

The fund’s manager, Dr Niall O’Connor, uses a variety of tools available to dial up or down the fund’s sensitivity to market movements. This results in broad asset allocation, with real assets accounting for a 35.8% share, followed by the 22.9% in convertibles, and the 10.7% in specialist lending*. Other areas include fixed return, structured credit, and other structured notes, according to the fund’s latest factsheet*.

*Source: fund factsheet, 30 April 2023


Photo by Kanhaiya Sharma on Unsplash

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions.Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice.Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.