Neptune UK equity star Mark Martin is set to pile into companies that are pouring money into capital expenditure and research and development (R&D).
Mr Martin took on the management of the Neptune UK Opportunities fund earlier this month when former manager Scott MacLennan left the firm.
The fund is Mr Martin’s first retail all-cap UK equity mandate. He said one theme he was looking to inject into the portfolio immediately was that of buying companies that were committed to long-term spending.
UK companies have in recent years been rewarded for cutting back on capital expenditure (capex) and R&D, and returning cash to shareholders.
Firms announcing spending cuts have seen their share prices rise, while those unveiling big spending plans have been hit because such plans imply less profit in the short term.
But Mr Martin said that as an investor trying to take a long-term approach, businesses investing heavily should reap more of a reward in the long run than those focused on appeasing the short-term whims of some shareholders.
He said: “Companies have been rewarded for high, free cashflow generation and in some cases that has been because the capex and R&D tap has been turned off.
“It ‘juices’ the short-term returns but it is not necessarily in the interests of long-term shareholders, which is what we want to be.”
The manager cited aerospace and defence giant Rolls-Royce and multinational chemicals company Johnson Matthey as two examples of companies that were continuing to invest heavily.
Rolls-Royce’s shares in particular have been in the doghouse in the past year, selling off sharply in October. But Mr Martin said that its extensive investment in new engines was required to fulfil its large order book.
He said the spending required to satisfy its orders was “using up cash” in the short term. However, he said once Rolls-Royce had completed its deliveries, it would have a “huge after market” of services checking up on and repairing the installed engines and other products.
He thought while the company might go through short-term pain, in the long run its spending would reward patient investors.
Another area Mr Martin said he liked was healthcare, such as pharmaceutical company AstraZeneca.
He said not only were many firms in the healthcare sector also investing heavily in R&D, but the larger companies such as AstraZeneca should be among the major beneficiaries of the strengthening US dollar. This was because most of the firm’s business came from the US and thus it would benefit from the currency translation back to sterling.
Mr Martin has been managing the Neptune UK Mid Cap fund since 2008 and was made head of UK equities in 2013.
The fund had the best-performance figures in the Investment Association UK All Companies sector in the past three and five years, and he said his stock-picking process should remain exactly the same as he moved into the large-cap space with the new vehicle.
But he said the UK Opportunities fund was likely to have an overweight position in mid caps and that he was finding many more opportunities from the smaller companies of the FTSE 100, those closer to the mid-cap space than mega caps.
