The FTSE 250 index has performed poorly in 2014 after an excellent 2013, as investors have become concerned about the impact higher interest rates will have on domestically facing companies.
However Martin, who heads up the five crown-rated Neptune UK Mid Cap fund, says investors would only be solidifying losses if they were to sell now, and adds that medium-sized companies, which derive the majority of their earnings from the UK, are likely to rebound over the next couple of months.
“I think confidence can return before interest rates rise,” Martin (pictured) said.
“If you were to look at the front page of the FT last week, there was an article on Mark Carney explaining the need to raise interest rates. A good rule of thumb in investment is that when you see a story on the front page of a mainstream newspaper, there is a very high likelihood that the market has already discounted it in.”He added: “If you are worried about the effect of interest rates on mid caps now, then I would politely propose that you are already a little bit late.”
The FTSE 250 was the best-performing UK index last year, with the vast majority of its members benefiting from the UK’s economic recovery and the increased appetite for risk.
However, timid earnings growth and growing geo-political risk, combined with the aforementioned potential interest rate rises, have all contributed to a correction in mid caps in 2014. According to FE Analytics, the index has lost 0.45 per cent over the last three months, while the FTSE 100 has returned 2.42 per cent.
Performance of indices over 3 months
Source: FE Analytics
Although Martin says returns have been hard to come by in 2014, he is optimistic about the outlook for mid caps.
“The major reason why mid caps have underperformed recently is because the prospect of interest rate rises has slightly spooked the market,” Martin said.
“This has meant that interest rate-sensitive stocks, which the mid cap index is overweight, have reacted particularly badly. We have been through an extended period of ultra-low interest rates and the market had become accustomed to them being so low, so this has been a bit of a wakeup call.”
“I think a lot of investors had forgotten that they could go up, but I think this is quite a healthy reversal.”
Martin praises Mark Carney, governor of the Bank of England, for alerting the market in good time and says that any talk of higher interest rates should be taken as a positive because it means that the UK economy is healthy.
The manager also attributes the initial mid cap sell-off to the implementation of the MMR (Mortgage Market Review).
While MMR had caused four months of decline in mortgage approvals, recent figures show numbers rose in June.
“I think MMR is a sign that the Bank of England is ahead of the game,” Martin said.
“In the past, it has just stood back while the housing market has gone from boom to bust, while now it seems they are taking steps to keep a lid on it. Though MMR did slightly spook people, it has actually put in place the foundations of a slightly less booming, but healthier, housing market.”
As FE Trustnet recently highlighted, Martin’s fund is a top decile performer in the IMA UK All Companies sector in 2014, with returns of 5.57 per cent.
Performance of fund vs sector and index in 2014
Source: FE Analytics
Martin says the reason his fund has outperformed is because he attempts to deliver cross-cycle returns.
He splits his portfolio into three silos: economic recovery, corporate turnarounds and structural growth stocks – which all perform differently in certain market conditions.
Martin has maintained a high exposure to structural growth names – such as healthcare and biotech companies – because he says they can outperform when the market is flat.
His recent returns have contributed to his strong longer-term track record.
Our data shows that his Neptune UK Mid Cap fund is the sixth best-performing fund in the sector since its launch in December 2008, with returns of 250.64 per cent, and has beaten its FTSE 250 benchmark by more than 35 percentage points.
Performance of fund vs sector and index since Dec 2008
Source: FE Analytics
Although the fund tends to lag behind the index during market rallies, like in 2009, 2010 and 2013, it has effectively protected its investors' capital during periods of stress. FE data shows it returned 3 per cent in the turbulent year of 2011, when its benchmark lost 10 per cent.
This means Neptune UK Mid Cap is a top-quartile performer for its maximum drawdown, downside risk, Sharpe ratio and annualised volatility since its inception.
Martin is positive on the current market. Although the manager sympathises with investors who have lost money in 2014, he says it was a necessary reversal from last year because it means some of the heat has been taken out of the equity market.
“There are a number of political risks on the horizon such as the Scottish referendum, the EU referendum and the general election, then geo-political risks like in Russia and Ukraine. They are all risks that I am well aware of, but they help to keep a lid on potential euphoria in the market.”
Martin added: “I don’t think investors should be concerned about clouds on the horizon when valuations are OK like they are now. However, they should be worried about blue skies ahead when valuations are high.”
Neptune UK Mid Cap has an ongoing charges figure (OCF) of 0.81 per cent.
