In spite of its previous good performance, the £90m Neptune China fund managed by Douglas Turnbull has this year found itself listed in Bestinvest’s ‘Spot the Dog’ report.
The report states that while the fund “rode the rally through 2009 and 2010”, its performance has lagged the MSCI China index benchmark ever since.
This could, in part, be a result of the fund’s concentrated portfolio, made up of 35-50 stocks that the manager feels will provide “the best total return from the opportunities identified in China in the next 18 months to three years”.
Given this medium-term timeframe, Mr Turnbull – who took over the fund in 2009 – argues the opportunities available as China looks to rebalance from investment growth to domestic consumer growth should help the fund.
Mr Turnbull, who runs the fund with Robin Geffen, says the investment process begins with the work of economists who set the parameters in which the sector analysts then make their base-case assumptions to find the best themes and growth opportunities, and to identify the characteristics companies will need to take advantage of these in the next 18 months to three years. This produces a ‘best ideas’ pool of stocks.
Mr Turnbull adds: “That throws up a lot of direct China ideas that will to a large extent guide a lot of the buys and sells in the portfolio. I’m on the ground myself three or four times a year meeting companies and specialist analysts so I can feed back what I’m seeing, and that will get fed back into the process and can be turned into further stock ideas.”
The fund, while sitting towards the middle of the IMA China/Greater China peer group in one, three and five years, has outperformed the MSCI China index benchmark in the very short term. For the 12 months to July 15 the Neptune China fund returned 14.21 per cent, compared with the MSCI China return of 12.33 per cent and the peer-group average of 15.44 per cent.
Mr Turnbull took over as lead manager on the fund in 2009, but Mr Geffen has been managing the fund since launch and is now named as a co-manager. From its launch in 2004 to date (July 15), the fund has significantly underperformed its benchmark, returning just 179.3 per cent compared with the benchmark’s 246.55 per cent return.
In five years to July 15, the fund has lagged its peer group quite considerably, returning 46.48 per cent compared with the IMA China/Greater China average return of 52.53 per cent. It marginally outperformed the MSCI China index figure of 39.86 per cent, according to Morningstar.
For the year to date, while the first quarter and the start of the third quarter of 2013 have been strong in terms of performance, the second quarter disappointed largely due to the fund’s weighting in financials and a few cyclical stocks it has now sold out of.
Mr Turnbull notes the Chinese economy is undergoing major structural reforms, with demand-side reform seeing a rebalancing from investment growth towards consumption growth, and supply-side reform of the large inefficient state-owned enterprises. The main consequence of these changes will be slower growth.
Mr Turnbull adds: “What it does mean is that the exciting opportunities are getting more exciting, especially because they are getting priced down with everything else. There is not much differentiation in pricing between winners and losers. So I am looking, even more than usual, for long-term, quality structural themes, whether that be in things like healthcare or telcos and the internet and that kind of infrastructure backbone.
“We’ve also been adding to the consumer sector, because we’ve seen through all of these changes that one of the key priorities is to keep consumer growth at a steady rate.”
For investors looking for a research-driven, disciplined process and a strong reputation in managing emerging market money, this fund could be one to consider.
EXPERT VIEW
Ben Willis, investment manager and head of research, Whitechurch Securities:
“Douglas Turnbull follows Neptune’s distinct industry and sector research to identify the areas in which to select stock positions. However, while this approach has seen it just about outperform its sector peer group, since launch it has underperformed its stated benchmark in the same period. Interestingly, Mr Turnbull manages an equity income version of this fund, which offers something different and is worth considering in the current climate.”
