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Bearing up

I first covered Jupiter absolute return fund when it was launched last December. At the time, I was quite glowing, so it is only fair to provide an explanation of its relatively poor performance since.

It launched to great fanfare and has attracted in excess of £600m, so for Philip Gibbs it has certainly been a terrible time to have – by his own admission – his worst-ever year in fund management.

I know he will not mind me saying he is apologetic and that it affects him personally as much of his own money is in the fund.

To recap, the fund seeks absolute returns irrespective of market conditions using all the ammunition at the disposal of the fund manager. This includes equities, bonds, currencies, commodities and the ability to short.

To be fair to Gibbs, it has been an extremely difficult year for what he is attempting and the crux of the problem is he has been far too cautious. The markets have swung between risk-on periods, when everything which is relatively risky does well, and risk-off phases where cash is the only place to be.

It is difficult for any fund manager to cope with this type of market but so far a long-only style has paid off, albeit with plenty of volatility along the way. Gibbs has not felt sufficient confidence in the market to invest significantly in equities and has therefore missed some of these gains.

In addition, he has shorted Japanese bonds, believing these to be overvalued, a position that has hurt performance as they have strengthened in the short term.

This level of caution is explained by his longer-term view of the world and it fair to say he is bearish, at least in relation to developed nations.
Interest rates can only rise in the West given the present rock-bottom levels,and he believes they will have to go up to combat inflation because demand from emerging markets will make commodities more expensive.

This will make servicing debt more difficult and his biggest concern is the huge levels of national debt taken on in the developed world and not just the well documented problems of smaller countries such as Ireland and Greece. Gibbs is worried about the UK, Japan and the US. Indeed, if you add in the problems of unfunded liabilities, I believe the UK is not in a dissimilar position to Ireland, with an enormous debt liability that is surely going to come back to haunt us.

This calls into question the wisdom, and the recent popularity, of investing in sovereign debt. Government bonds are traditionally low-risk securities, but Gibbs believes it is only a matter of time before weaker nations start to default. He therefore has considerable exposure to currencies he feels are strong, including the Swedish krona, Norwegian krone and the Swiss franc. He only has a 10 per cent net exposure to equities, instead preferring high-yield bonds where he sees the balance of risk and reward being more favourable.

What should you do if you hold this fund or are thinking of buying it? While he has had a poor 2010, Gibbs remains one of the very best managers in the UK. His record over 15 years is nothing short of superb and he was one of the few fund managers who made money amid the turmoil of 2008, so he should not be underestimated.

However, the fund is likely to lag if a bull market in risk assets ensues. So if you disagree with his rather bearish view of the world, the course of action is to avoid the fund. But who can be sure that he will not be right in the longer term? Even if you do not share his views, I think this fund has a useful place within most portfolios as that bit of insurance against things going wrong.

I have been disappointed with performance but I added to the fund a few weeks ago. To me, it is still a buy. If there is one thing that Gibbs hates, it is poor performance so you can be assured it is getting his keenest attention.

Mark Dampier is head of research at Hargreaves Lansdown

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