Breese took over the portfolio from Errol Francis in July after the latter left with Richard Buxton for Old Mutual.
He notes that when he managed Neptune Special Situations it outperformed the Schroders fund and that his high-conviction style should translate well in his new role.
"The Schroders fund hasn’t done badly but is consistently in the second quartile and I will be looking to take it up to the first quartile," he said.
"The fund was too close to the benchmark. If you want to consistently outperform, you need to be different from the benchmark, so fewer holdings and larger positions."
Breese says he is trimming the portfolio down to between 40 and 60 stocks and expects it to have an average of about 50.
"Today we have 58 positions in the fund and in terms of the biggest positions we go up to a 4 per cent active position, but typically it will be closer to 3 per cent."
Breese says that the last manager ran the fund with a "load difference" of plus or minus 8 per cent per sector, which means he maintained a significant weighting to sectors even when he may not have wanted to.
The new manager will aim to be invested in at least seven of the 10 ICB [Industry Classification Benchmark] sectors for diversification purposes, but will be able to go down to zero in certain sectors if he sees fit.
This freedom is important in periods such as the run-up to 2007, when Breese wanted to have minimal exposure to financials.
Data from FE Analytics shows that Neptune UK Special Situations made 39.21 per cent in the last three years that Breese was in charge, compared with 24.9 per cent from Schroder UK Equity.
Performance of funds vs sector in 3yrs to 17 April
Source: FE Analytics
Breese points out that on a risk-adjusted return basis, he also outperformed, and our data confirms this.
Over the past three years, the Sharpe ratio on Neptune UK Special Situations has been substantially higher, at 0.85 compared with 0.56 on Buxton’s fund.
Breese says that he has so far reduced or sold 18 of the fund’s holdings, for a number of different reasons.
"The first reason is valuation," he said. "There are some holdings I felt were trading on very high valuations and I thought risk/reward was skewed towards the downside."
Experian is a good example of this, the manager says: he describes it as a very good company but too expensive at 21 times earnings.
The second category of company is that in which the business is fundamentally unattractive in the manager’s view. Synthomer is one example.
"Valuations are not too bad and attractive compared with the market at under 12 times earnings, but I have concerns about barriers to entry and the quality of the underlying business," Breese said.
The third set of stocks are those which the manager likes but do not fit his style and strategy.
"Some of the stocks I inherited do not fit with my investment approach and I would point to a number of small EMP positions in the fund, which I have exited."
The manager says he has introduced 10 new positions, including a number which he is well familiar with from his time at Neptune, such as Qinetiq and 3i.
"Generally the sector weightings have changed the most in the resources area where I have moved to a more underweight position," he said.
"I still feel it’s prudent to be underweight as the demand side of the equation is looking shaky."
"The investment-to-GDP ratio in China is about 48 per cent, far higher than we have seen in any large economy historically."
The manager says that returns on capital in the resources sector have been falling steadily since 2008, and there is still the need for an improvement in management in this area.
He has increased the weighting to healthcare and consumer discretionary stocks and cut the number of stocks with less than 1 per cent of the fund in them to seven from 15.
"If you believe in something, it should be a decent weighting in the fund," he said. "There’s still a lot more work to do: I have changed about 30 per cent of the fund so far."
The manager explains that he takes a contrarian, value-based approach, looking for companies that are unloved and misunderstood.
He says that sentiment shows up anomalies in market valuations, allowing him to outperform even in the well-researched UK market.
The companies he buys tend to have underperformed for a period of one to five years. Ladbrokes is one company he thinks could be a turnaround story in the future.
Schroder UK Equity requires a minimum initial investment of £1,000 and has on-going charges of 1.67 per cent.