Neptune’s Martin relieved by oil price bounce

Neptune’s Martin relieved by oil price bounce

Funds with an underweight to energy and related sectors could be at reduced risk of underperformance against their benchmarks, following the recent bounce in the price of oil.

Mark Martin, manager of the £623m Neptune UK Mid Cap fund, noted that his portfolio’s underweight to commodities, energy and materials could have put its relative performance at risk if there was a sharp recovery in the price of the commodity when it hit its low.

Now that oil has regained some value – currently hovering around the $40 per barrel mark – he sees less risk of dramatic upwards movements affecting the underweight fund.

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“When the oil price was at [its lowest point] and everyone was consensually bearish on commodities and oil, there was more risk of a significant bounceback in oil and commodity prices, which is what we’ve seen,” he said.

“Now that the oil price has bounced back quite significantly and we continue to be underweight energy and materials, the risks to being underweight are lower.”

However Mr Martin, who is also Neptune’s head of UK equities, was reluctant to forecast future movements for the commodity.

“We’re just concentrating on fundamental valuations of companies. I’m not making any forecasts on the oil price,” he said.

Meanwhile, Mr Martin is expecting merger and acquisition (M&A) activity in the industrials space – to which the fund is overweight – to pick up this year, labelling this the “next obvious step” for the sector.

He said there had been less of this activity than usual, and that reasonable valuations could lead to takeovers.

“We haven’t had as much M&A [activity] as you would usually expect over the past few years. There’s usually more in the FTSE 250 [index] and in small-cap indices,” he said.

“Valuations are still reasonable, financing costs are quite low but are potentially rising as bond yields increase.

Also, lots of companies have cut costs and expanded their profit margins and have grown organically as much as they can, so the next obvious step is M&As.”

The Neptune UK Mid Cap fund is down 1.8 per cent over one year, compared with the UK All Companies sector, which is down by 4.3 per cent.

The vehicle has delivered 37.4 per cent across three years, while the sector returned 18.1 per cent over the same period, data from FE Analytics shows.