S&W Enterprise Fund's Net Exposure Nears Historic Low As Shorting Opportunities Rise

The £136m fund is currently running a net long position of just 14% as its managers Rupert Fleming, Mark Boucher and Mark Swain prepare to tackle the end of quantitative easing and "stock dispersions" within sectors.

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Swain (pictured) said: "Investors have made a lot of money in the bull market, but as we move from a period of extensive quantitative easing into one where such support is being wound up, it creates an even more supportive environment for funds like ours.

"Long only managers can try to avoid the increasing number of bullets, but they can no longer rely on hope and optimism, particularly as stocks which fail to meet the market's expectations are getting more harshly treated than they have for years."

He added examples of this harsh treatment are being seen "on a weekly basis", with stocks like Provident Financial, which faced a 70% decline in 2017, falling sharply because valuations of the broad market are overly elevated.

"There is asymmetric risk to the downside now in UK equities, and it is creating as fertile an investment environment for funds which can go both long and short, as we have seen since the peak of the eurozone financial crisis in 2012," he said.

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The UK-focused fund, which targets a long equities range of between 10% and 30%, has its largest gross short position of 22.1% in consumer products, according to FE. However, this is reduced to a net short position in the sector of 0.3% as a result of a gross long position of 21.8%.

Swain also has net short positions of 1.8% and 1.6% in utilities and real estate, respectively, in addition to 3.6% in other sectors.

Meanwhile, the fund's largest long exposure is in materials, industrials and financials, with portfolio weighting of 6.3%, 4.4% and 4.1%, respectively. The lowest net long-equities exposure the fund has ever had is 9.1%.

The fund is up 4.4% on a one-year basis and 34.6% over five, beating the IA Absolute return sector, which has returned 4.3% and 16.5% over the same period.

Swain said while volatility has been muted so far at a broad index level, this has masked stock dispersions within sectors which have been increasingly aggressive.

"Our net exposure is currently at this low level because there are so many shorting opportunities," he said.