Launched in September 2010, the £27.7m Neptune US Income fund aims to provide a rising level of income and is targeted at investors seeking regular equity income and long-term growth from the North America region.
It has been managed by James Hackman since June 2014, with Felix Wintle and Patrick Close as assistant managers, since the departure last year of Mr Hackman’s predecessor, Rebecca Edelman.
Mr Hackman has instigated changes since taking the reins. “Over time, companies paying dividends outperform non-dividend payers, driven by the power of compound interest. But significantly, companies with growing dividends typically outperform companies with purely high dividend yields on a total return basis,” he explains. “As such, 2014 was a year in which I shifted the focus of the fund from companies with high dividends to those with growing dividends. These companies typically come with lower risk than companies with high dividends, which may be at risk of a dividend cut, since the dividend is able to grow hand-in-hand with increased profitability and their payout ratios are lower and therefore more sustainable.”
He says macroeconomics play a part, as Neptune’s approach is driven by a proprietary process based on the notion “that the world of equities should be viewed at a global industry or sector level, rather than taking the more traditional, regional, benchmark-driven approach”.
Mr Hackman notes: “The Neptune US Income fund draws on this central research process. [But] with my accounting background, my focus is on selecting those companies identified by our central research process which are turning earnings into cash and who have strong balance sheets. This enables those companies to return cash to equity shareholders in the form of a growing dividend, supporting the total return outlook for the company.”
The fund sits towards the middle of the risk spectrum at level five out of seven, according to the key investor information document for its C Accumulation share class. Ongoing charges sit at 1.01 per cent.
The fund has delivered a reasonable return of 82.5 per cent since launch, although this lags behind both the IA North America sector average of 90.57 per cent and the 102.68 per cent rise in the S&P 500 index over the period to March 4, 2015.
The performance has improved since Mr Hackman took charge, with the 20.07 per cent return from June 1, 2014 to March 4, 2015 only marginally behind the peer group average of 20.22 per cent and the index rise of 21.15 per cent, according to data from FE Analytics.
The manager notes that recently, the fund has added some more consumer discretionary stocks with the aim of increasing US domestic earnings exposure in expectation of a strong US economy and the boost from lower oil prices, and to avoid foreign exchange headwinds on US multinationals due to US dollar strength. He adds: “The fund continues to focus on stock selection over sector allocation but has overweight positions in materials and consumer discretionary. These overweight positions are funded through underweight positions in energy and telecommunications, two sectors where we believe the risk of dividend cuts is high.”
The best-performing holding in 2014 was data storage firm Iron Mountain, as its conversion to a real estate investment trust created a catalyst for paying excess capital to shareholders in cash and shares. “During 2014, the fund’s underweight position in energy was beneficial along with stock selection,” says Mr Hackman. “The underperformance of the fund against the benchmark was caused by positions in GameStop and Mattel, which have been exited due to their high dividend yield but low dividend growth outlook and the risk of a dividend cut.”
That said, he is optimistic about the US economy. He says the strong dollar thesis should keep inflation low, enabling the Federal Reserve’s monetary policy to be supportive. “By keeping interest rates lower for longer, the Fed then provides consumers, corporates and the government further time to strengthen their balance sheets and increased consumer confidence supports a recovery in end demand,” he explains.
EXPERT VIEW
Rob Morgan, pensions and investment analyst, Charles Stanley Direct
This fund saw a manager change in 2014 with James Hackman taking over from Rebecca Edelman. Mr Hackman has got off to reasonable start with this small and nimble portfolio, though clearly it is still early days. Neptune has recently revamped its investment process with 10 lead sector analysts each running a global model portfolio, which it is hoped will add further conviction. It will be interesting to see if this has a positive impact on stock selection.
