How Return to Fundamentals Creates Shorting Opportunities

Anthony Aboud

Anthony Aboud

Portfolio Manager
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Perpetual funds like the Share-Plus Long-Short Fund and Pure Equity Alpha Fund may use both shorting strategies and long positions in their attempts to generate a return for investors. But with equity markets performing well since the Covid-inspired dip of 2020 is there still a place for shorting companies and sectors the investment team feels are overvalued? In this Q&A we asked Portfolio Managers Anthony Aboud and Sean Roger about the opportunities they’ve taken to short companies over the past year.

The S&P/ASX 200 Index had a good 2021, gaining 13% not including dividend payments. This made for a difficult environment for shorting. How did you do?

As tough as this period was, we felt that the market gave us some very good opportunities to short companies that we felt were materially overvalued. We isolated companies and sectors where we felt the market was either overestimating the quality of a company or underestimating the risk of future competition. The past three to six months has seen the expectation of rising interest rates return and this has been the catalyst for market participants to start shifting their preference away from concept and narrative investing and back to fundamental analysis. This has had the biggest impact on profitless companies that are reliant on capital markets to fund future investment and growth. This shift has seen a number of our short positions fall materially. 

What has been the toughest part to get right?

One thing about shorting is that getting the timing right is extremely difficult. You could have a great short angle on a stock which eventually goes your way. But you could still struggle to make money out of it because you got your timing wrong and had to stop yourself out at the top. Shorting can be a brutal game as has been discovered time and again in the last few years. However, it has been extremely pleasing that we have been able to generate good alpha from our short book in the last 12 months. 

You took a firm position on ‘Covid winners’ in the ecommerce space in early 2021, predicting the large sales and profit boost they received would reverse over time. How did you arrive at this view?

While there is no doubt the size of the online retail market had permanently increased, we felt that a large portion of the gains in revenue and especially gross margin would prove to be transitory. We expected to see significantly more competition in the online channel in the post-Covid world versus pre-Covid. We had observed large offline retailers significantly increase investment in the online channel during lockdown and our analysis indicated that this investment would likely accelerate. We felt that this increase in competition and investment by both digital native companies (like Amazon) or behemoth land-based retailers (Woolworths and Wesfarmers) would impact online retailers by creating significant inflation in customer acquisition costs and put pressure on pricing and gross margins due to price discovery being significantly more transparent online than offline. 

This is not a risk that was considered by the market?

It is important to note that, at the time, this risk was not being articulated by either the sell-side analysts or the companies themselves and, as we explained in the first-half of calendar year 2021, in our view was not reflected in consensus earnings forecasts. Therefore, we felt the risk was not being priced in. This is a really important point. In our view, one way to make money in a deeply researched country like Australia (both on the long and the short side), is to identify companies and sectors where your analysis predicts a future which is materially different from the consensus narrative. Of course, you need to also be right! This is where we spend a lot of our time. Trying to forecast the impact of changing industry structures, what the future competitive environment will look like and finding stocks and sectors where our analysis differs materially from the consensus narrative. 


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