Mark Potter

Investment fund managers are usually well educated people and the best ones have talent and intelligence too. Sometimes it is interesting to read what they publish about their own research, which can be very wide ranging.

A fund I have known for many years, in fact even in forms before it got its current name, is the Jupiter Absolute Return fund. This is run by Dr James Cluney, who got his PhD researching the processes of stock market shorting in the UK and elsewhere. His fund tends to be a sort of parachute, slowing portfolio losses when things are really going wrong, but being a bit of extra weight to carry when markets are soaring away.

He correctly predicted the market sell off in 2018 and more or less protected his investors from losses. This year, he has lost money and although that is to be expected if markets go up when logically they shouldn’t, I wanted to see if he had commented on the reasons. Investors may be tempted to sell out if they just read the recent numbers.

I have not so far found a very recent article or interview but I did find a fascinating and indeed quite insightful piece into how share valuations are now influenced by what is a called the ‘narrative’ effect. Essentially this is the flow of news, both true and ‘managed’ (ie to suit the issuer’s purpose) that is available from both traditional sources and more often than ever, social media.

For example, he explains that he has been ‘shorting” Tesla shares, so he is one of the people Elon Musk hates. On every technical measure used by fund mangers, shorting Tesla shares is logical, but we know that Elon Musk does his utmost (including illegally recently) to pump up the Tesla share price by using media of all types, essentially trying to control the Tesla news narrative. We can’t him blame for that unless he wonders off into telling ‘porkies’!

Another example might be the floatation of Lyft and Uber. In the case of Uber, we even had the company complying with the law by stating it may never make a profit, but so managing the other ‘facts’ (most of which are irrelevant when examined carefully) that is raised billions of pounds from investors who may never get paid a dividend! That it stretching optimism to its limits and beyond.

As a cautious fund manager, whose objective is to preserve client capital, Dr Cluney has to take a view about whether he can afford to stick to his convictions based on real data and yet, at least for now, see share prices move in line with what is basically propaganda, or give up and ‘go with the flow’. I wrote another post recently about the option of momentum investing, for members.

In his article he expresses concern that as people follow the lead of the US president by manipulating the facts, telling straight lies and blustering, then it becomes difficult to make decisions based on facts, because there may be more information around that is pure ‘fog’ designed to hide the reality from investors than it is possible to see through. One might add that like many motorway drivers there are plenty of investors happy to carry on at full speed even though they have no idea what is a few dozen meters ahead of them.

As Mr Musk found out, blatantly ‘pumping’ a share price with a misleading announcement will be punished by regulators. However, there are techniques that may not be so easily spotted. According to Dr Cluney, algorithmic research tools read words in media content and make positive or negative judgements according to the words counted. But people working in the investor relations departments of businesses know that! So they can use their writing skills to fill up press releases, tweets and other social media posts with positive words, even if out of context (algorithms not being so intelligent) and get a share onto broker ‘buy’ lists even when the underlying truths was negative!

As usual, we can’t know what will cause the next market crash – it is usually one of the ‘unknown unknowns’. But I would have a small bet on fiction having at least temporarily defeated fact being major contributor.