For Clunie (pictured), it’s not necessarily the case that one of them has to be wrong about the company. Over coffee soon after he arrived at Jupiter, Clunie told the Wealth Manager Forum in Edinburgh, he and his fellow manager discussed their positions.
The long investor set out his case convincingly, based on Intertek’s long-term prospects. Clunie observed that his rationale for the short was, appropriately, the short-term outlook.
Clunie identified Intertek as a candidate for shorting due to its lofty valuation – 23 times earnings – and the likelihood that it would have to downgrade its earnings guidance given its exposure to clients in the commodities space. Its share price has dipped 4% since 2014 began.
His other present shorts include Campbell Soup, Kering, SABMiller, and Diageo: firms whose quality he does not doubt, but which trade on high price-to-earnings multiples and face profit downgrades. ‘I never thought these stocks would halve, but I thought you could make 10-15%,’ Clunie reckoned. SABMiller, for one, has vindicated him as its share price has dropped by 9% already this year.
According to Clunie, his ‘edge’ in the keenly contested absolute-return sector is his talent for shorting single stocks in this manner.
‘A lot of managers who were long-only try single-stock shorting for a while, find that it is awfully difficult, and then move on to index hedging,’ he said.
The former Swip man sympathised with others’ travails. ‘Short selling is very difficult in practice and in theory. Basically, you expect theoretically to make a loss shorting because of the equity risk premium. It is also riskier than long-only investing because your downside is theoretically unlimited. So this is an area where you theoretically expect to lose money and have higher risk than going long. It has to be done extremely well or not at all.’
Clunie confirmed that he buys in data on what other short sellers and stock lenders are doing to give him an advantage.
‘There is about 25 years of evidence that this data is meaningful, that it has informational value. It can help you identify when to short, it can spot catalysts for you, and it can warn you against when not to short.’
Yet Clunie appreciated that competitors were parsing the same information. ‘You can never relax. People know these databases are valuable and they are constantly trawling them, so I continue to do research. It is almost like a research arms race when a new dataset comes out: you research it and get an edge, then someone else finds a new database, and you’re constantly competing to try to find better meaning.’
He continued: ‘Now, they have the right to research back and try to overtake you, so I do think of it as a war. If you are at least doing this best practice, you are probably better than average because the average manager probably does not have the time or resources or focus to do this. If you are better than average at something in the markets, you might have an edge. You can never relax and it is a constant research arms race, but I think there is a limited number of people doing this thorough work.’
At the moment, Clunie’s research is focusing on what is emerging from the new disclosure requirements on short sellers and on what can be gleaned from M&A data.