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‘I live in constant fear’: James Clunie takes on Buffett
by Dylan Lobo on Jul 08, 2014 at 10:49
While these trades have proved to be profitable, Clunie admits going against one of the world’s legendary investors comes with health warnings. ‘I live in constant fear. What does this famous investor know that I don’t know – what have I got wrong?’
Going against the grain
Across the wider portfolio, Clunie’s biggest long conviction is towards oil majors, including BP, Statoil, Total and Exxon. He believes this ‘unfashionable’ area has the potential to surprise significantly on the upside as it gets more disciplined with its cash. His net long exposure stands at 13%.
‘These stocks have invested badly over the years on poor projects and shares are lowly rated. They have now said they will invest less and cherry pick projects,’ Clunie said.
‘In two or three years we could see a better return on capital and the market which once thought these firms were “rubbish” will decide they’re actually “okay”. This is not linked to the oil price or the economy, simply a disciplined approach to good projects and there is potential for 50% upside within three years.’
On the flipside, Clunie is running a 15% short on high quality firms with strong balance sheets. These include Diageo, Intertek and Campbell Soups. ‘A lot of these stocks remain highly rated even though they have suffered from earnings downgrades. They haven’t fallen enough.
‘People tend to love quality firms like Diageo – “this is a long-term idea and I want to own it forever” they think. Diageo is a good company, but at the moment a bad stock.’
Meanwhile the lack of volatility in markets has encouraged Clunie to buy into Deutsche Bourse and spread betting firm IG Group in anticipation of an eventual emergence of turbulence.
He has also bought gold for the first time since he assumed control of the Absolute Return fund last September. He views his 1.5% exposure to the precious metal as a hedge against continued central bank balance sheet expansion.
Overall, he is not particularly excited about the prospects for most asset classes in the medium term and will be happy if he can ‘grind’ out 6% a year for the foreseeable future.
‘Future returns for bonds, equities and some parts of property will be dull for the next eight to 10 years based on starting yields, price-to-earnings ratios and profit margins. The path could be choppy but ultimately the level of return will be dull.’
Clunie has revived performance on the Jupiter Absolute Return fund since he took command, returning 3% in the nine months to the end of May, versus 0.35% in Libor GBP three months. In the 12 months prior his arrival, the fund had lost 1.33% under Philip Gibbs.
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