UK stocks BP and Serco are some of the best long ideas in the Jupiter Absolute Return portfolio, according to manager James Clunie, while overvalued US stocks continue to make the most attractive shorts. 
Earlier this week, FE Trustnet discussed the reasons for the portfolio’s lacklustre last 12 months. Since the start of 2017 it has lost 3.94 per cent.
However, despite the recent losses, particularly in the second half of last year, commentators believed the fund remains a strong option as a defensive anchor to an investor’s portfolio.
Performance of fund vs sector and benchmark since start 2017
Source: FE Analytics
Below the manager of the £1.4bn fund outlines some of the best ideas from both the long and the short book of the portfolio.
Long book ideas
Starting with the positives, Clunie (pictured) said that the two best ideas he has in his long book both reside in the UK.
Under-pressure outsourcer Serco is the first, though Clunie said that it feels too controversial even for him to say it out loud.
“I have a feeling that my best idea is long Serco but I am very frightened of saying it,” he said.
The reason he is bullish on the firm is that it has been unduly hit by negative sentiment towards its sector following rival Carillion going bust.
Additionally, peer Capita announced a shock profit warning a month ago which also included a £700m rights issue and the suspension of its dividend.
As a result, shares in the UK’s largest outsourcer plummeted, down 65.65 per cent over the past 12 months.
Despite not being caught in the news, Serco has also suffered, losing 22.51 per cent over the last year, and Clunie said “everyone is saying that space is just dead”.
Performance of stocks over 1yr
Source: FE Analytics
“Serco went through what Capita is going through years ago – new management, right offs, raising capital and its share price falling 90 per cent,” he said.
“Now it is picking up contracts from Carillion and I have feeling that Serco is completely mispriced and is a really great idea but I am so scared of saying it in public because it could be such a stupid thing to say.”
The other is BP, with StatOil another that would be a good idea for investors if interest rates begin to rise as he expects.
“(BP) is my biggest long and a good stock for this environment as integrated energy companies are really defensive in shocking times,” he said.
“Commodity prices tend to do well at these turning points when interest rates start to go up. So I think BP is a good medium-term solid defensive idea.”
Short book ideas
On the short side, the Jupiter Absolute Return fund manager said electric car manufacturer Tesla remains the most attractive short position in the world.
“It has got to be Tesla – all the catalysts are there for it but it refuses to break,” he said.
“I know it is controversial: it is fundamentalists like me versus storytellers like Musk and his followers on the other side but really if that was a British stock it would almost be bankrupt by now yet somehow it is worth $50-60bn.”
A more recent short position put in place last week is premium burger company Shake Shack, which despite problems over the last 12 months has gained 8.85 per cent.
“We have the CEO selling shares, the company disappointing on earnings, the valuation high while the supply of premium burgers is huge – so that is one of our ideas,” Clunie said.
However, shorting is a more complex and tends to be riskier than taking a long position and there is therefore more chance of making mistakes.
While the manager continues to hold a short position in online television content provider Netflix, he said it has been a particularly difficult short to get right.
Indeed, despite his concerns, the stock has more than doubled over the past year, up 104.47 per cent, as the below chart shows.
Performance of stock over 1yr
Source: Google Finance
“The catalyst for shorting it was that they are investing so much money in new content but so is everyone else – Amazon, Hulu, Disney. It is an arms race for supply of content,” Clunie said.
“When you get an industry where there is an enormous investment in new supply normally the long-term returns fall because there is oversupply relative to demand.”
While this was the theory behind shorting the stock, in practise the market has focused more heavily on the growth in subscribers which have exceeded expectations.
“The catalyst is still valid so we have some short there but the market doesn’t care for our catalyst, the market says that subscriber growth is great and growing and we will buy it,” he said.
“We were wrong in the sense that the market is concentrating on something totally different and so we have been part retreating and taking losses.
“But we still think it is overpriced, it has a catalyst and the balance sheet is very weird with poor cashflows because of all the investment.”
As such, while the manager said the position has been a painful one for the last year thanks to higher subscriber numbers, eventually returns on investment must catch up with it, making it an attractive short position.