The chief executive of Neptune Investment Management, Robin Geffen, has warned the vast majority of UK equity income funds are going to underperform this year as managers sink into complacency.
“Since the global financial crisis, there has been a massive free lunch for investors who are focused on small and mid-cap companies,” he said, claiming many fund managers have not had to do any proper stock-picking at all.
Mr Geffen pointed to figures from Morningstar which found the asset allocation to small and mid-cap companies increased to 40 per cent at the start of this year from 30 per cent in 2011.
Data also revealed that 116 out of 121 small and mid-cap funds have outperformed the FTSE 100 since 2009.
This is going to be the first year since 2009 when the vast majority of UK equity income funds are going to underperform Robin Geffen“But free lunches do not last forever, and this one is now over,” he said, adding: “This is one of those signal moments when you want to let off a firework to let people know the game has substantially changed.”
The Neptune founder said it was “very clear” asset allocation needed to be re-examined, saying for example fund managers fail to understand the impact emerging markets will have on their portfolios.
His £198m Income fund is now benefitting from its large cap focus, making it one of the seven UK equity income funds to have outperformed the FTSE All Share in the past year.
According to FE, Neptune Income has returned 10.4 per cent over the past year, against its peer group, the IA UK Equity Income sector, which has returned 4.7 per cent over the same period.
“This is going to be the first year since 2009 when the vast majority of UK equity income funds are going to underperform the FTSE All Share, and while most people they are not going to believe it, now is the time to do something about it.”
Equity income funds had previously struggled to make profit from exposure to large and mega caps, but Mr Geffen said this headwind has now shifted into a tailwind as these companies benefit from having most of their earnings overseas.
He also warned bond proxies are beginning to falter, saying: “I don’t think investors appreciate the risks in bonds and those equities that have a high correlation with bonds; that is rife in the UK market.”
This coincides with views from Richard Buxton, chief executive of Old Mutual Global Investors, who sold out of some holdings in bond proxies due to concerns these investments could be hit hard if inflation rises.
Mr Geffen said the last five or six years have been “extraordinary” because interest rates have barely moved.
“There is this sense that the status quo will remain forever, but that is not something that is going to persist.”
The Neptune chief said a lot of complacency has built-up in the market, adding: “When people don’t think change is going to happen, that’s when change happens, and bad things happen to people who fall asleep on their watch.”
Dan Farrow, director of SBN Wealth Management, said: "I don't think that it's a sector thing per se, but it's all about sensible, active management of a portfolio.
"As the Neptune fund is rather small, it only needs a few successful directional investments to make a difference, but it's the long term, consistent performance metrics and costs that we need to look at.
"Unfortunately Neptune doesn't come top on our 'top funds' list."
