The manager has built up a very strong reputation since the fund’s launch in December 2008. Over three years Neptune UK Mid Cap has returned 81.87 per cent, and almost 200 per cent over five years.UK mid-caps have had a tougher time of late, prompting some to pinpoint a potential buying opportunity in funds focused on this area. However, when asked if his fund could do as well in the coming years, Martin (pictured) said: “No, I don’t expect the fund to [deliver the same returns]. I don’t expect the fund to perform as well in absolute terms. Markets were coming from a low valuation base since 2009 and that’s not the case now.”
“I continue to see valuation opportunities, but I don’t expect the fund to perform quite as well. You have to be realistic because valuations are much higher now.”
However, the manager says he’s confident he will be able to outperform his FTSE 250 ex IT benchmark in the coming years, which he thinks is set for real returns of around 7 per cent over the next 10 years.
Over the past five years, the index has annualised returns of 19.54 per cent, while Neptune UK Mid Cap has managed an impressive 24.03 per cent.
Martin has consistently trounced his peers and benchmark, returning an impressive 252.06 per cent since December 2008 – more than doubling the returns of other funds in the IMA UK All Companies sector.
Performance of fund vs sector and index since 2008
Source: FE Analytics
The key to his success, Martin says, is his balanced ‘three silo’ strategy which helps him protect better than his peers on the downside.
“I’ve always focused on a balanced, three silo strategy. When the market has really been racing high, we haven’t kept up with markets,” he said.
However, Martin says he hopes investors can stomach being a few percentage points behind in rising markets in exchange for being protected when markets tumble.
“It’s the way I’ve always invested. It’s hindered us when markets have been ripping higher, but it’s helped us when markets are flat or falling,” he said.
Indeed much of Martin’s outperformance has come in the down markets of 2011, when the fund was up 3.65 per cent.
The average fund in the sector lost 7.04 per cent that year and the index fell more than 10 per cent.
Neptune UK Mid Cap performed in line with its peers but lagged the index as markets rallied in 2013, but so far this year the fund is up nearly 6 per cent, well ahead of the sector and index which are down 0.38 per cent and 1.14 per cent, respectively.
Year-to-date performance of fund vs sector and index
Source: FE Analytics
The manager says the fund’s outperformance so far this year, when small and mid-cap stocks have suffered widespread earnings downgrades, is down to its relative underweight in the ‘economic recovery’ portion of his three silo strategy, and relative overweights in the ‘structural growth’ and ‘corporate turnaround’ silos.
“Domestic economic recovery is a theme that’s been very popular and we’ve been successful from it, but valuations have risen to historically high levels,” he said.
“It’s hard for the share price to rise further because people would have to be even more optimistic than they already are.”
Martin says he always keeps at least 20 per cent of the fund invested in each silo, to ensure he isn’t overly skewed to one style or sector.
Overall, the manager is still positive about the outlook for mid-cap stocks and says he’s seeing a lot of value opportunities after the sell-off earlier this year – particularly in companies which sit at the large end of the small cap index.
He says unlike some he has welcomed the volatility, because it suggests there is more room to run in the current bull market.
Volatility, he argues, helps to keep a lid on the euphoria that often marks the calm before the storm, as we saw before the financial crisis in 2007.
“There’s a lot of things to be worried about, but from a sentiment perspective, that’s arguably a good thing,” the manager added.
Martin says there are quite a few risks to markets which should keep a bit of volatility in the mix.
He is most concerned about political and geopolitical risk with the Scottish referendum coming up in September, the UK general election next year and the proposed EU referendum .
“Any one of these could have a negative impact. It’s hard to say [what would happen] if Scotland voted for independence, but it would increase uncertainty and the market doesn’t like uncertainty,” he said.
If the Labour party comes into power in the next general election, markets could again feel shocks, according to Martin.
Though he says Labour leader Ed Milliband isn’t likely to be as aggressive as his rhetoric suggests once he gets into office, the event could still unsettle the market.
The outcome of an EU referendum could also lend itself to volatility, increasingly uncertainty about the future of the UK within the European community, Martin says.
He also points to the destabilisation of the Middle East, shown through the actions in Israel and Gaza this week, and the ongoing conflict in Syria, as factors to be wary of. The tense situation between Russia and Ukraine is another wrench in the mix.
“It’s hard to see how markets can become euphoric with those types of clouds on the horizon. And they’re quite well-known clouds,” he said.
Neptune UK Mid Cap has clean ongoing charges of 0.81 per cent.
