The first mid-cap focused fund from Neptune has certainly done what it set out to do when it launched in December 2008.
With an objective of delivering top-quartile performance, the fund has significantly outperformed both its peers and the FTSE 250 index over one and three years, ranking second in the IMA UK All Companies sector over both time periods.
Over three years to January 2 2013, the fund has returned almost double the gain on the FTSE 250 index, with returns of 82.08 per cent, and triple that of its IMA UK All Companies sector average. The fund has done this by investing in FTSE 250 companies and the 50 largest companies by market capitalisation listed in the FTSE Small Cap index, with a key focus on strong management teams.
Managed by Mark Martin, the £48.4m fund has both a qualitative and quantitative investment approach and while the fund is littered with undervalued companies that he believes are potential takeover targets, he also favours those that have the potential to acquire companies.
An example he cites is that of AG Barr, the soft drinks manufacturer, recently merging with Britvic, which has strong brands but a weak balance sheet, meaning AG Barr could pay a relatively low amount for the Britvic business.
Mr Martin says: “The investment style does not really fit into any one box. Most importantly, I look for companies where the present value of future cashflows, conservatively estimated, is significantly in excess of the current market value. As a generalisation, I blend being a value contrarian with looking for growth at a reasonable price.
“In the medium-long term, the world will be increasingly Darwinian: the strong will get stronger and the weak will get weaker.”
Mr Martin attributes the fund’s strong, consistent performance to its balanced structure, which looks to outperform across the economic cycle. However, he admits that, at times, this high conviction approach can mean the fund underperforms its benchmark.
He says: “The fund underperformed the FTSE 250 in the months after Ben Bernanke announced further quantitative easing (QE2) in August 2010 as the market aggressively sought out the most cyclically exposed companies, especially those with weak balance sheets, which tends not to be where the fund is focused.”
The portfolio typically has a low turnover as the manager says he knows the companies he likes and tends to stick to them, with overweights and stock selection in areas such as industrials, consumer discretionary and healthcare sectors all contributing to the fund’s outperformance.
In contrast the manager says the only sector to have detracted from performance in the past 12 months has been a small exposure to the telecommunications sector.
“From a stock perspective, the worst performer was materials stock Gem Diamonds. However, we have maintained a position in the company because of the attractive long-term supply-demand dynamics in the diamond market.”
While the manager is generally positive on his outlook for 2013, he suggests some areas of the market are beginning to look overvalued, with unusually high profit margins, and warns investors should continue to be selective.
Expert View
Martin Bamford, managing director of Informed Choice: “This fund has managed to buck the poor performance trend at Neptune, delivering first-quartile returns to investors in the past three years. It looks set to become a very popular fund once it achieves a five-year track record. While being run by a relatively inexperienced fund manager, Mark Martin has got off to a great start and quickly established himself as a competent mid-cap manager. The ability for this small fund to move nimbly within FTSE 250 stocks has allowed the manager to exploit investment opportunities. His initial work as an analyst appears to have served Mr Martin well with his ability to identify under-analysed stocks an important factor in his success to date.”
