Short selling provides the returns

LAST week’s article discussed hedge funds and some of the innovative investment strategies they employ to achieve their goals.

Some ‘mainstream’ fund managers, such as Platinum Asset Management and Portfolio Partners, employ similar strategies.

Both Platinum and Portfolio have achieved impressive returns over the past few years (see table) helped by strategies like short selling.

Platinum, which runs several international share funds, has a distinctive investment style based on stock picking. It pays no heed to aligning its portfolios with standard industry benchmarks, such as the MSCI Index, which tracks global share markets.

This approach gives investors a very different outcome from what Platinum calls “traditional index-hugging funds”.

Platinum also has a high degree of flexibility. For instance, it short sells stocks that it believes are over-valued. In other words, it sells stocks that it does not own, in order to benefit from a falling share price.

Managing director Kerr Neilson said Platinum had been “very active in shorting those companies which are being treated by investors as safe havens and are on improbable ratings”. Currently, 24 per cent of the International Fund’s assets have been short sold.

Platinum also has a substantial portion (23 per cent) of the International Fund invested in cash because it has found so few undervalued stocks.

“We have been using this uncertain period to look for great franchises at attractive prices but are failing to come up with much,” Mr Neilson wrote in Platinum’s September quarter report.

Interestingly, Platinum regards prominent tech companies, such as Sun Microsystems, Peoplesoft and Foundry Systems, as good value.

Portfolio Partners’ $75 million High Growth Shares Trust is another managed fund that stands out

from the pack. It holds a divers-

ified portfolio of Australian

shares and aims to outperform the S&P/ASX200 Index over the long term.

It is distinguished by its use of short selling, margin lending and active trading strategies to enhance returns.

For instance, the Fund profited from SingTel’s falling share price in October by short selling that stock. It profited from the rally in Brambles’ share price by using margin lending (ie borrowing extra money) to be overweight.

It also has profited from the volatility in Qantas’ share price over the past few months by actively buying and selling the stock.

As a result, the Fund has out-performed both the Index (see table) and most actively managed Australian share funds.

Portfolio Partners has a relatively positive outlook, tipping a recovery in the US in 2002, and believes equity markets are significantly undervalued.

The strategies employed by Plati-num and Portfolio Partners can be risky.

If they pick the market correctly, returns are magnified, but if they get it wrong, losses are also magnified.

Therefore, these funds would suit more aggressive investors or those who want to diversify their portfolio.

The High Growth Shares Trust generates high levels of taxable income each year and is therefore best suited to being held in a superannuation fund with its lower tax rate.


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