Written by Callum Abbot

April, 2020

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Standing out from the crowd in UK equity

Most equity investors generate returns by buying shares of stocks they think will go up.

However, investors can benefit from stocks that they think will go down, using a technique called short selling, or ‘shorting’. To take a short position, an investor borrows the stock from a broker and then sells it at the current market price. At a later date, the investor buys the stock, or ‘covers’ the short position, ideally at a lower price, and pockets the difference. It’s buying low and selling high in the reverse order.

The ability to short stocks is the defining feature of the JPM UK Equity Plus fund. Shorting provides a differentiated source of alpha and increases the potential for the fund to outperform the FTSE All-Share index and its peers. It’s what makes it stand out in a congested peer group, where 98% of UK managers are limited to long-only strategies.

Shorting for long-term returns

Just as important is the ability to identify those stocks that are likely to perform badly. Since the launch of the fund, the identification of attractive short positions has contributed positive alpha to the JPM UK Equity Plus fund in roughly 80% of quarters.

In 2019, for example (but with no undue reliance on the past as a guide to the future), we were able to short eight out of 10 of the worst performing stocks in the FTSE All-Share and did not own the other two. This positioning contributed over 3.3% of alpha for the year. Long-only managers, in contrast, only had one way to express a negative view on these stocks—not owning them. But the extent to which long-only managers can underweight stocks is constrained by their benchmark weight. As a result, not owning these stocks last year would have generated just 34 basis points of alpha.

The near 10-fold boost in alpha shows how a manager with the ability to short, and the required skill to consistently identify the worst stocks, has the potential to materially increase returns for clients. Shorting, done well, is a differentiated source of alpha.

Liquidity risk

Shorting is sometimes considered high risk. This association may be driven by stories of racy hedge funds being caught out in short positions they cannot close, driving huge losses. However, this is more often an issue with liquidity rather than the shorting per se. There are plenty of examples on the long side where failure to manage liquidity properly has driven disastrous results for investors.

We tightly manage the liquidity of short positions in JPM UK Equity Plus. We do this by limiting each stock positions to around a day’s total average traded volume.  Our investment process covers the entire universe so we can identify a range of short opportunities. Lots of positions means we can be nimble; quickly building positions where we see opportunities and not taking the risk of being stuck in positions we cannot close if they go against us.

Past performance is not a reliable indicator of current and future results.

JPM UK Equity Plus Fund Investment Objective

To provide long-term capital growth through exposure to UK companies by direct investments in securities of such companies and through the use of financial derivative instruments (derivatives).

JPM UK Equity Plus Fund Risk Profile

  • The value of equity and equity-linked securities may fluctuate in response to the performance of individual companies and general market conditions.
  • The fund invests in securities of smaller companies which may be more difficult to sell, more volatile and tend to carry greater financial risk than securities of larger companies.
  • The fund can use sophisticated investment techniques that differ from those used in traditional equity funds.
  • There is no guarantee that the use of long and short positions will succeed in enhancing investment returns.
  • The sub-fund uses financial derivative instruments for investment purposes. The value of financial derivative instruments can be volatile and may result in gains or losses in excess of the amount required initially to establish a position in the derivative. The ACD is required to disclose in Appendix A of the Prospectus the sum of the gross notional exposure of the financial derivative instruments used (including those used for hedging or efficient portfolio management) as the expected level of leverage. However, this figure does not take into account whether the instrument increases or decreases investment risk and so may not be representative of the overall level of investment risk in the sub-fund.
  • The possible loss from taking a short position on a security (using financial derivative instruments) may be unlimited as there is no restriction on the price to which a security may rise. The short selling of investments may be subject to changes in regulations, which could adversely impact returns to investors.
  • The single market in which the fund primarily invests, in this case the UK, may be subject to particular political and economic risks and, as a result, the fund may be more volatile than more broadly diversified funds.

For Professional Clients only – not for Retail use or distribution This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Prior to any application investors are advised to take all necessary legal, regulatory and tax advice on the consequences of an investment in the products. Investment is subject to documentation, which is comprised of the Prospectus, Key Investor Information Document (KIID) and either the Supplementary Information Document (SID) or Key Features/Terms and Conditions. These documents, together with the annual report, semi-annual report and instrument of incorporation are available free of charge from JPMorgan Asset Management (UK) Limited. This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.

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