Mistakes made, lessons learned

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Betting against Netflix, the N in the FANG acronym that represents the tech heavyweight companies, was the wrong call for the Jupiter Global Absolute Return Fund, according to Spence.

During the screening of the stock universe for short position candidates in the long/short strategy, “Netflix screened as an expensive stock, which was burning cash very quickly,” Spence said. “We saw people focused on subscriber numbers as the reason to buy the shares, rather than profitability.”

After fundamental analysis reaffirmed the views, the fund took a small short position in Netflix in mid-2016. In the game of short-selling, however, fundamentals are only one piece of the puzzle. The rally in a stock price won’t reverse until other traders jump on the short-selling bandwagon thereby exerting downward pressure on the price.

Although Spence is convinced that his fundamental analysis was correct, the market didn’t think so and short-selling pressure did not materialise. The stock price more than doubled between the early 2016 and today. The fund subsequently exited the position at a loss.

“One of the lessons we’ve learned from that is when you find a really good short, you’re almost always too early, because the rest of the market will try to push this stock up,” Spence said. “This is why the ecology side [monitoring of other short-sellers’ behaviour] is important, because we need to know when other people are starting to short the stock to push down the price.”

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