Absolute return funds are a challenge to manage well. Unless you earn a premium by loading up on basic risks like beta, duration or credit, your returns are likely be low in the absence of some sort of investment ‘edge’. But the search for an ‘edge’ is highly competitive. We work within a ‘zero sum game’ – if one person outperforms then by definition someone else must have underperformed. Actually, with costs included, it’s a ‘negative-sum game’. In such a harsh, competitive environment, can a small team find and maintain an ‘edge’?
For the Jupiter Absolute Return portfolios, the fund management team consists of me and my colleague Ivan Kralj. Our job is to run the funds and to communicate what we’re doing to our investors. ‘To run the funds’ is shorthand for taking calculated risks, working within our area of potential ‘edge’ – namely, single-stock short-selling – testing the strengths and weaknesses of our approach, and being willing to learn from our mistakes. To paraphrase Mr Buffett, our job is ‘simple, but not easy’. But how can two people compete against large teams at large firms that, in turn, are competing against us?
The answer lies in Jupiter’s highly supportive investment culture and the way we use data and academic research to seek to make our approach efficient and robust.
Within the absolute return team at Jupiter, there are actually four analysts/fund managers and a consultant. Mike Buhl-Nielsen and Tommy Kristoffersen, my other teammates, work on a different fund (a European long/short equity fund with dynamic option hedging). Although we manage distinct funds, we sit together and exchange ideas as often as we like. We don’t structure formal review meetings into calendars, weeks in advance. We simply talk to each other when it matters and we want to do so. I like that. The consultant, Adam Reed, is a US academic from the University of North Carolina who specialises in short-selling and publishes work at the highest level. He gives us a significant portion of his time and helps us with insights and evidence from the academic literature. He also does coding and data analysis work (more on this later). When it comes to managing the Absolute return strategy, these are good, specialised resources.
But it doesn’t stop there. At Jupiter there are a dozen investment teams (known as ‘strategies’), each of whom design and practise their own investment process. Examples include multi-asset, fixed income, Japanese equities and global value equities. There is overlap between many of these, and this overlap means we are able to draw on a larger pool of experts when managing the funds. For example, our funds tend to have a clear value orientation. That makes the work of Ben Whitmore and Dermot Murphy of the ‘global value equities’ team very relevant to us. They sit about ten metres away from Ivan and me, and we find them to be professional and collegiate. They follow an evidence-based approach, which they have practised for many years; they’re very good at what they do. Unsurprisingly, we exchange ideas and analytical insights quite often. We do the same with the Japanese equites and emerging markets team, and even exchange top-down ideas with the fixed income team from time to time.
It’s actually a pretty big group. There are around 60 investment analysts and managers in total. A valuable part of Jupiter’s culture is that ‘constructive criticism’ is encouraged. Not everyone likes to do this, but it can be very useful. Usually, when a disagreement over a stock arises (say I am shorting a stock, but a colleague is buying it) the cause is that we have a different ‘time horizon’ for the position. Understanding what motivates a position taken by a colleague is valuable information. And with each team thinking for itself, we end up with a diversity of opinions. Independent thinkers, transparency and collegiality – it’s a great resource.
There is lots of evidence, found mainly in the academic literature, of regularities and anomalies in stock markets, and of signals in datasets. Examples include the performance of stocks ahead of their entry into rules-based indices; the performance of stocks after director share purchases; the relationship between the asset growth of a firm and the subsequent risk-adjusted return on the shares. Where there is evidence that something works, we would like to use that insight. To do this we have sought to automate (or at least semi-automate) a number of our processes.
To illustrate this, when we identify a dataset we believe contains ‘signals’, such as a stock lending or director transaction dataset, we investigate the dataset and possibly buy a licence for the data. Then, we would feed in the data, usually through a daily upload to the cloud. There, the data would meet some code that we have written, designed to identify and extract the ‘signals’ from the dataset. This coding is done either by our in-house data scientist, or by Adam Reed, our academic consultant. The code would then generate an email, sent automatically each morning to me and Ivan, highlighting the key insights from the dataset. We would then layer this signal with other parts of our process to see if we should place an order to take advantage of the insight generated.
This strikes me as a sensible way of extracting the most value from purchased datasets. It’s time efficient – the process is automated right up to the daily email we receive – and resource efficient as we scour the entire dataset looking for signals, and it’s customised to our needs. This helps our small team to be very efficient in processing large amounts of data.
There are many other colleagues in Jupiter who help us to do our work. This ranges from centralised dealers, who inform us of liquidity and market conditions, to risk analysts, who measure and analyse performance and identify adverse scenarios for our portfolios. Our communications work is aided by investment writers, PowerPoint specialists and compliance officers who ensure that our output is fair and verifiable. There is a substantial team of people behind each and every fund.
Overall, I don’t see that we’re a small team at all, but instead a well-resourced and well-supported team, with an emphasis on the efficient use of resources. Think of Ivan and me as simply the ‘visible part’ of the iceberg.
This content is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. It is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued by Jupiter Asset Management International S.A. registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. For investors in Switzerland and the UK: Issued by Jupiter Asset Management Limited which is authorised and regulated by the Financial Conduct Authority, registered address is The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission. No part of this content may be reproduced in any manner without the prior permission of Jupiter Asset Management Limited or Jupiter Asset Management International S.A.