Yet to reach his five-year track record, when undoubtedly advisers will begin to flock towards this fund, Mr Martin attributes his achievement so far to “conviction in the investment process” and a self-imposed limit on the number of holdings.
The fund is Neptune’s first to be dedicated to the mid and small-cap parts of the market and while the fund’s benchmark is the FTSE 250, the manager does have the flexibility to invest in the top-50 companies, by size, in the FTSE Small Cap index.
Mr Martin notes: “We have in the past got some good alpha from those small-cap names and continue to see some interesting opportunities among those small-cap companies partly because that particular part of the market is under researched, even more so after the great financial crisis.”
Mr Martin explains a very important feature of the fund is its structure, where he splits the investment in the fund between three different ‘silos’. These are recovery, which means stocks exposed to economic recovery, the second is structural growth and the final one is turnaround/self-help stories or corporate recovery opportunities.
He adds: “I always have at least 20 per cent of the fund invested in each of the three silos. That is to ensure diversification, to ensure we keep cross correlations under control and obviously to try and maximise risk-adjusted returns, which are very important.”
The weightings to the silos are influenced partly by the in-house economic views, although Mr Martin says: “The single most important thing for me, is that every company that I own in the fund has to have at least 20 per cent upside – we do various scenario analysis – and every company in the fund has to have 20 per cent upside on the valuations that I do and also I believe that every company has the potential to be taken over.”
Just short of its five -year track record, the fund has returned an impressive 219.62 per cent since its launch in December 2008 to September 4 2013. This compares favourably with the 169.86 per cent from the FTSE 250 index in the same period and the 99.74 per cent IMA UK All Companies sector average, according to Morningstar data.
It has also outperformed both the benchmark and the sector average in one and three-year periods to September 4, with the fund’s three year return of 100.13 per cent outstripping the benchmark by 41.67 percentage points. Mr Martin says: “The diversification of the three-silo strategy combined with trying to keep a lid on the number of companies we hold in the fund is responsible to a significant degree to our strong performance in both up and down markets.
“We’ve stuck to this process from the beginning. At times it has been a bit painful, in August 2010 and for the rest of that year Ben Bernanke announced QE2 and we actually lagged the mid-cap index for a while because everyone thought QE2 was going to be the answer to all our problems and got excited and so bought the most cyclical highest beta stocks.”
In addition, the manager highlights the fund is also guided by Neptune’s global sector process, with Mr Martin noting that while stockpicking is important “getting your sectors and sub-sectors right is very important”. Of the three silos, recovery has produced strong performance, according to Mr Martin, particularly from the housebuilder names.
“We bought into this sector in 2009, fairly early into the housebuilding story, and we bought into it because we felt the government would be likely to incentivise housebuilding. Also valuations were very low. But in housebuilders we’ve gone from being substantially overweight to underweight as target prices have been reached and we’ve found better opportunities elsewhere.”
While not yet at its five-year track record, the strong performance of the fund is undeniable and the disciplined investment process of Mr Martin and the team make this a strong contender for investors looking for exposure to the small and medium end of the UK market.
EXPERT VIEW
Rob Morgan, pensions and investment analyst, Charles Stanley Direct:
Verdict
“Overall, this is an interesting fund to consider for exposure to medium-sized companies – a dynamic part of the UK market. However, four years is still a relatively short period to be managing a fund, so while Mr Martin could be an emerging talent who we will be following with interest, this fund is not currently part of our Foundation Fundlist of preferred funds across the major sectors.”
