Optimism is as American as baseball and apple pie. And since the financial crisis, being optimistic about US equities has paid off: they have outperformed every other major developed market by a comfortable margin.
Yet while there remain plenty of good reasons to be optimistic about US equities, Stephen Moore, manager of the Artemis US Extended Alpha and Artemis US Absolute Return funds, believes conditions are changing in favour of managers with the flexibility, skills and experience to sell short.
He says: “Shorting stocks during the period of asset-price inflation that stemmed from the extraordinary liquidity injections provided by central banks has been difficult. The accumulation of reserves by countries with high current-account surpluses (think of Saudi Arabia) has also helped to pump up the valuation of financial assets over the last 15 years.
“Today, however, the US Federal Reserve seems intent on removing excess liquidity from the financial system. Meanwhile, the accumulation of reserves, particularly by OPEC economies, is slowing – or even going into reverse.
“In a global economy struggling with too little growth, too much debt and excess capacity, the US remains a bright spot. Yet although the relative strength of the US economy appears set to continue, we should note that the profits US companies derive overseas have doubled as a percentage of GDP in the last decade, so the slowdown in overseas economies carries risks. And with monetary policy and foreign portfolio flows no longer combining to create a rising tide, the prospects for short-sellers have improved significantly.”
In addition to managing the downside risks posed by these new economic and monetary conditions, short selling enables stock-pickers to take a more targeted approach by hedging away their exposure to unhelpful economic or sector trends. The media sector provides a good example of the way Stephen uses short selling to manage risk and reduce the funds’ exposure to unhelpful thematic trends.
As he explains: “Buying any stock means buying a bundle of different risks. Some of those risks may be unwanted – they may even make an otherwise good company uninvestable. Comcast, for example, is a great business. But its NBC Universal division, which operates in the cut-throat media content market, represents a risk. Media content has become a very competitive business. Fifteen years ago, about 20 new TV shows were produced each year – now there are almost 200. It is difficult to protect the value of your product when supply increases that much. We can own the ‘good’ parts of Comcast while hedging away our exposure to the unattractive economics in other parts of its business by taking short positions in media production companies.”
Stephen launched the Artemis US Extended Alpha Fund in September 2014, building on his success running a similar strategy at Threadneedle. Since then, it has returned 21.5 per cent, compared to 11.7 per cent from the index (and 10.1 per cent from the IA North America sector)*. It has, moreover, done this with a lower volatility of returns relative to the index than its peer group.
The Artemis US Absolute Return Fund, meanwhile, followed a month later. An equity long/short fund, it aims to deliver a positive return over a rolling three-year period, irrespective of changing market conditions. Again, it draws on the experience that Stephen and his team amassed in running a similar strategy at Threadneedle. Since its launch on 27 October 2014, it has returned 7.0 per cent versus 0.5 per cent from its cash (three-month Libor) benchmark and a sector average of 4.1 per cent.**
To find out more about the pricing and performance of both funds, use the links below and download the latest factsheets.
*Data from 19 September 2014. Source: Lipper Limited, class I GBP accumulation shares, mid to mid in sterling to 30 October 2015. All figures show total returns with net income reinvested. Sector is IA North America NR, universe of funds is those reporting net of UK taxes.
**Data from 27 October 2014. Source: Lipper Limited, class I GBP hedged accumulation shares, mid to mid in sterling to 30 October 2015. All figures show total returns with net income reinvested. Sector is IA Targeted Absolute Return NR, universe of funds is those reporting net of UK taxes.
THIS INFORMATION IS FOR PROFESSIONAL ADVISERS ONLY and should not be relied upon by retail investors.
There is no guarantee that the Artemis US Absolute Return Fund will achieve a positive return over the longer term or any other time period and investors' capital is at risk. The fund may hold large cash deposits. The costs and benefits of currency hedging transactions will apply to hedged shares. The additional expenses of the fund are currently capped at 0.25%. This has the effect of capping the ongoing charge for the class I shares issued by the fund at 1%. Artemis reserves the right to remove the cap without notice.
The Artemis US Extended Alpha and US Absolute Return Funds will use derivatives to meet their investment objectives, to protect the value of the funds, to reduce costs and with the aim of profiting from falling prices. Artemis Fund Managers Limited is entitled to a performance fee per share.