Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by James Clunie, Manager of the Jupiter Absolute Return Fund.
Hello, James.
James Clunie: Good morning, Emma.
Wall: So, of course, you are going to say that now is the perfect time for absolute return funds because you are a manager of an absolute return fund. But it does look like the world is conspiring for something like this, something that's focused on capital preservation to be a tool that investors really need right now.
Clunie: Yeah. I think, in principal, this should a good time for absolute return funds. But in practice, who knows. Because managers, active managers are as likely to make mistakes as they are to get things right. So, I would say, you've got to be careful. The managers have to be very thoughtful. I'm not sure this is one of those moments where you go all in and sort of take one-sided risk. I think you need to balance a lot of different possibilities and maybe tilt the portfolios and try and do sensible things. So, it should be a good time for absolute return funds. Let's see.
Wall: Unlike, say, a global equity fund manager, you have the ability to short things that you don't like. What is making you nervous at the moment? What assets are you saying actually you think they are going to drop?
Clunie: It seems as if almost everything has priced off low interest rates, whether it's bonds, equities, property, infrastructure. There are only a few outliers. Every now and then you say, well, maybe gold is not fully related, maybe Russian equities are a little bit cheap. I looked the other year and I saw that Cincinnati residential property looked sensibly priced. But we can't all move to Cincinnati to exploit it. There is a real limit to how many things look sensible. Most things look like they are priced off an extreme set of conditions. In other words, they are fully or heavily priced, they are really expensive. And that makes me nervous because what could happen for maybe the first time in our careers is that almost everything falls at the same price and that's going to be scary. Because the classic way of defending diversification isn't going to work. And it's like, wow, everything we've learned might prove to be useless. And so, it's going to be a really exceptional set of circumstance if interest rates were to rise dramatically from here.
Wall: You talked about valuation there, which is a sort of bottom-up approach. But I know the top-down is also something that overlays your investment process. How important is the macro outlook to you and how does it make you feel at the moment?
Clunie: I sometimes feel it's unforecastable. We worry about stuff. We create a portfolio of stocks long and short and then we say, look, we've got a lot of risk exposures. Then we say what could go wrong, what if interest rates went up, what if they went down, what if the politics there deteriorated, what if there was a trade war, what if – and there is no end to what you can worry about. And we try to say, look, if there's cheap insurance for any of these, let's buy it. But actually, we can't make the portfolio invulnerable. But let's interlink it in such a way that we would lose a modest amount of money if we're wrong. And that's the best thing to do, to accept that you will sometimes misread the situation that you will make modest losses. But keep them modest by blending things in. And if you can buy cheap insurance and hedge or even over-hedge, you might end up going up a little bit in an environment that topples other people over. That's really useful for your clients.
Wall: James, thank you very much.
Clunie: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
