Speaking at Citywire’s Alternative Ucits conference, the investment director said that while it is important to utilise factors like value-at-risk attribution and style analysis to minimise errors, having too rigid a risk management process can cause fund managers to open themselves up to the vagaries of wily rivals.
‘It is all helpful, but you must never be rigid when using risk management tools. The risk team, CIO and compliance people always want you to be rigid and have a documented process because that is what society demands.
‘It is a mistake in investment terms to be rigid. You should be process oriented and structured with a framework, but never rigid and I think this is going to be a good source of alpha: understanding the rigidities of risk management systems of big investment firms and just attacking them,’ he said.
He is doing this by ‘attacking the use of stop losses’ among rivals. ‘I think attacking risk management systems is going to be great source of return in the future,’ he added.
The manager (pictured), who is Citywire Alternative Ucits A-rated, has also now taken profits on short positions on stocks exposed to the Chinese slowdown. These included luxury brand Mulberry, which he last short sold at £22, having made 55%. The fund’s short book is now more stock-specific and currently features Domino’s Pizza and Stobart.
‘Domino’s Pizza is a former growth stock but it appears to have stopped growing, [and] people are desperate believers in foreign growth,’ Clunie explained.
He is also positive about current market conditions, arguing there has been a return to fundamentals, which makes it a stockpicker’s market on both the long and the short sides.
As a result, he has around half of the portfolio in cash and T-Bills to give him optionality. At the end of October, the fund had a net market exposure of 44.5%. It is a great asset manager’s market,’ Clunie added.
In an honest admission, Clunie said his decision to go short Hargreaves Lansdown and Croda in the past had not worked out. Even though he viewed the share price as overvalued, he said there had not been a catalyst for other short sellers to intervene.
Nonetheless, these factors have not dampened performance too much, as Clunie has posted a 26.2% return on the Swip UK Flexible Strategy fund over the three years to the end of November versus a 2.4% rise by three-month Libor.