There’s no magic box of tricks when it comes to long-short investing, says Barry Norris, who runs Argonaut’s top-performing Absolute Return fund. He buys 30 longs, 20 shorts, and holds them, on average for around two years. And the strategy appears to be working: the fund is up 78 per cent over five years and 52 per cent over three.
Like his long funds, the Absolute Return fund is a European-only portfolio, although it includes UK stocks. What it is not like is the other funds in the absolute return sector.
Other absolute return funds are all about reducing volatility and promising to eke out returns in any market environment. But they have largely failed; the average absolute return fund has given investors a measly 12.5 per cent gain over five years. Once fees are lopped off, they have been no better than money saved in a cash Isa, even at today’s terrible rates.
“Our view is that absolute return is for low or non-correlation to the stockmarket, not low volatility itself,” says Norris, hastening to add that his fund has actually enjoyed low volatility as well. “Frankly, with other funds you have not made much out of them but have paid high fees.”
Norris uses the same investment approach in absolute return as he does with his other Argonaut funds. “What we exploit is forecasting error and the fallacy that the market is efficient, especially in large caps.”
A large cap stock may have scores of independent analysts following it, but most behave in a herd-like manner, he says. “Analysts will look at the consensus and be a little more or a little less bullish, because of career risk. They are also generally overconfident in their own earnings forecasts.”
He cites Standard Chartered as an example. It’s a stock the fund has consistently shorted. “Standard Chartered had 28 analysts following it and not a single one forecast a loss in 2015. But we were forecasting that a year before.”
Norris takes both a top-down and bottom-up view on stock selection, and we speak as there are two giant macro phenomena – the ECB ‘big bazooka’ and the UK referendum on EU membership. Neither, he reck-ons, is much for investors to get excited about.
“The ECB’s action will support debt markets and equity valuations. But it is not going to solve the outlook for companies in terms of corporate profitability.”
Britain won’t pull out of the EU, he confidently forecasts. “Fears over Brexit have already peaked. The referendum is a way of drawing a line under the feud in the Conservative party. It’s not something the whole population has very strong views on. I will be pretty astonished if the vote is even close.”
He doesn’t specifically say which way he’s voting, but is otherwise pretty clear. The two fastest growing economies in Europe are Spain and Ireland, both in the Eurozone, he points out.
He also has an Italian bank as one of the largest long positions in the portfolio. An Italian bank? Aren’t they all close to bankruptcy and full of dodgy loans?
That’s another great myth, Norris says. He likes Intesa SanPaolo, one of Italy’s biggest banks, with 4,000 branches and 11 million customers. “The number of non-performing loans [NPLs] is high, but Intesa already has a provision for 60 per cent of them. At the same time, NPLs have been coming down.”
He reckons Intesa will be able to write back some of those provisions before long, boosting profits. “It’s the stand-out company in an admittedly tricky sector,” he says. Des-pite the intense negativity around Italian banking stocks, Intesa’s share price is up from €1.40 when he bought in 2013 to around €2.70 today.
Pandora, the Danish jewellery company, is another favourite. It is fast expanding its retail network across Europe, with like-for-like sales up 30-40 per cent as well.
The stock is up four-fold since Norris first invested, but he’s still a big fan. “Profits have risen in line with the rise in the share price, so valuations have not actually gone up. What’s more, the price of silver, its single biggest cost, has been coming down.”
Ryanair is another major long position. He thinks it is not as geared into the oil price fall as much as other airlines, but it helps, and the business model continues to work almost wherever it flies. Currently it is expanding rapidly in Germany.
The share price is nearly triple what it was as recently as 2012.
But what about the short stories? Many fund managers are cautious about publi-cising their short positions, but not Norris. At the macro level, he has been short on oil companies and businesses exposed to China.
At the pure stock level, Norris cites French supermarket group Casino. It’s a European giant, with 12,000 stores, three-quarters of which are in France, and it employs 329,000 people. It’s big in Latin America too, and is the largest retailer in Brazil and Colombia.
“It has a very complex corporate structure, where the chief executive owns around half of it through a holding company, Rallye,” says Norris.
“The debt is a higher number than the value of the company. If it had to pay back all its debts tomorrow it would be bankrupt. It is having to overdistribute dividends to service the debt of its holding company, and its current profits are inflated by one-off property sales.”
At 47 euros, it shares are below where they were five years ago.
Norris is finding a lot of support among IFAs; this week Jason Hollands at Tilney Bestinvest was tipping the absolute return fund as a core holding. Although it is fancier than most funds, it can be found at 0.75 per cent on most platforms, with a minimum investment of £500.
But there is a sting in the tail; there is a performance fee of 20 per cent on everything he makes for you above 5 per cent.