Jupiter adds short option

The ability to short stocks has been added to the mandate of the £31.5m Jupiter Primadona Growth investment trust via its £200,000 trading subsidiary.

Fund manager Paul Sheehan can short stocks he expects to fall following a restructure of the trust's trading subsidiary, which is primarily used to augment the trust's income account.

Sheehan said: 'In rising markets it has added more money, but in the bear market we have dramatically cut back on its activities and it is a small part of what we do. But it does give us an extra option if the market were to recover and we felt more optimistic.'

Under their tax-exempt status, investment trusts are restricted to making 15% of revenue from trading, which is characterised as the exploitation of short-term price movements as opposed to buy-and-hold investing. Hence those that operate trading strategies tend to hive them off into subsidiary units. The trading subsidiary currently comprises six long and three short positions, Sheehan said.

Asset writedowns and sales of illiquid assets hampered performance of the trust in 2002 but a renewed focus on liquid stocks is expected to boost returns this year. The trust has just released its interim results showing the NAV decreased by 19.1% over the six months to 31 December 2002, against a fall of 17.1% in the FTSE World Index. The decline in NAV included the impact of share repurchases, which Sheehan said will remain on the agenda in 2003.

Chairman Christopher Surtees told shareholders the underperformance was due to a poor period for small and medium-sized companies, the costs of selling off smaller, illiquid assets and the writedown of some unquoted investments. Further writedowns of unquoted stocks were carried out after the half-year end, he said. Surtees expects a migration into more tradable companies to bring performance and liquidity benefits.

Sheehan plans to focus on more liquid stocks with unquoted investments off the shopping list for the present.

'There will be a time and a place for unquoted stocks but, in the current market environment, it is not a place for new investments,' he said.

Sheehan is continuing to target undervalued stocks but said identifying growth in the current market is proving difficult.

He currently favours small and mid-cap equities, although the trust has around 20% exposure to blue chips.

'There are no sector or size limits on the trust and if we find some of the bigger stocks are offering growth, we will buy,' he said. 'However, we are finding more undervaluation and interesting companies among the small and mid-cap stocks.'

Sheehan added the trust remains very stock-specific in focus, with an emphasis on companies with asset backing rather than high earnings growth, as well as stocks that are out of favour with the market due to unpopular ownership structures or sentiment issues.

He said: 'We are not an income fund, so we don't chase after yield, but there are a lot of low P/E, high-yielding shares around and, if buying them brings us in some extra income, that's fine, we will distribute it.'

Surtees fees the short-term outlook for markets remains difficult. 'Many of the themes that have driven equities lower over the past few years remain in place, including overvaluation of certain sectors, lack of corporate pricing power and cashflow pressures,' he said.

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