The Neptune Global Equity fund has faced a tough run over recent years with performance dipping significantly below its peers, but former FE Alpha Manager Robin Geffen (pictured) has seen returns spike over the past few months after some of his high conviction plays started to bear fruit.
Between the start of 2014 and 7 May the £498.9m fund dropped an eye-watering 10.37 per cent, compared with a fall of just 0.27 per cent and a 1.48 per cent decline in its average peer in the IMA Global sector. A number of positions, including an overweight to Japanese equities, hampered the fund over these months. Over this period, the fund was the second worst performer in the 260-strong sector. Only Andrew Dalrymple's £58m Aubrey Global Conviction fund lost more, with a fall of 13.90 per cent.
Performance of fund vs sector and index over 6 months
Source: FE Analytics
However, Neptune Global Equity’s performance has turned around over more recent time frames. Since 7 May the fund has returned 14.72 per cent and become the sector’s fourth best performing fund.
It now sits in the first quartile over three and six months after rebounding much faster than the MSCI World and its average peer from the six-week correction that recently struck equity markets.
Geffen said: “The autumn markets have tested the nerves of investors. Yet for the Neptune Global Equity fund it has also been a period when a number of our highest-conviction views have paid off, rewarding us with strong performance.”
Neptune Global Equity has been positioned for some time to take advantage of a strengthening dollar against sterling and the yen, which worked against the fund at the start of 2014. However, as the Federal Reserve confirmed plans to bring its quantitative easing programme to an end, the fund’s exposure to the dollar has started to pay off.
“The more hawkish comments by Fed chair Janet Yellen at the end of October confirmed that the central bank understands this and is keeping its nerve to draw the tapering programme to a close. It is gratifying that we also kept our nerve and can now benefit from our conviction,” the manager said.
James Dowey, Neptune’s chief economist, believes the Fed will be able to tightening its monetary policy before the Bank of England as it has less need to support its housing market, which would cause further upside for the dollar.
Neptune believes the dollar could reach $1.5 to the pound, from its current $1.6.
Positioning for a stronger dollar, Neptune Global Equity has taken one of its largest weightings to US equities in several years at 47.5 per cent. Its top-10 features US stocks such as social media firm Facebook, derivatives and futures exchange operator CME Group, technology giant Apple and professional services provider Marsh & McLennan.
Not all commentators expect US equities to benefit from continued gains in the strength of the dollar, however. Capital Economics says a further rally in the dollar would cause US exporters to lose market share unless they cut prices while firms selling to the domestic market would face more competition from imports.
John Higgins, chief markets economist at the consultancy, said: “The adverse impact that further dollar strength could have on corporate earnings adds to the list of reasons why we are not especially upbeat about the prospects for US equities themselves.”
“Indeed, we forecast the S&P 500 to grind only slowly higher in coming years – our end-2016 forecast is 2,100, just 4 per cent or so above its current level.”
Neptune Global Equity’s recent performance has also been aided by its overweight to Japanese equities, which had a difficult start to the year but recently surged after the Bank of Japan (BoJ) surprised the market by expanding its quantitative easing plans.
Last week, the BoJ said it will target monetary expansion of Y80trn a year - up from its previous goal of between Y60trn and Y70trn. Japan’s Nikkei 225 is now at a seven-year high as investors return to the country on the back of the extra stimulus.
Geffen said: “Few sell-side analysts had anticipated this move. However, we were positioned to benefit from it. The fund has built a 34 per cent position in Japan and we have also hedged our yen exposure to amplify the effect of the diverging policy stances.”
“We believe the Japanese equity market can make significant progress from here, and the yen will continue to weaken. In our view the Bank of Japan will continue to loosen monetary policy to reach its inflation target, whilst the Japanese market is also set to benefit from the much anticipated move by Japan’s state pension fund to double its equity allocation to 25 per cent.”
The manager had been buying Japanese stocks well positioned to benefit from policy action before the BoJ made its announcement last week. For example, a new position in Sumitomo Realty & Development was started in October, taking exposure to Japanese real estate and construction companies to 17.5 per cent.
This sector was a key beneficiary of last week’s rally with Sumitomo and Mitsubishi Estate, both of which the fund owns, rising a respective 12 per cent and 14 per cent on the day of the central bank’s announcement.
Geffen’s £875.4m Neptune Balanced fund has jumped in the IMA Mixed Investment 40%-85% Shares sector’s first quartile over three and six months, after a similarly tough start to the year. It has returned 4.66 per cent over six months, compared with a sector average of 1.85 per cent.
Neptune Balanced also has a decent weighting to US and Japanese equities, with its September factsheet showing 26.4 per cent in North America and 9.8 per cent in Japan.
His £341.4m Neptune Income has also moved into the first quartile after being in the fourth quartile over three and five years.
While Neptune Global Equity’s short-term numbers have rocketed, it remains in the IMA Global sector’s fourth quartile over three and five years. It has made 38.89 per cent over five years, underperforming the 75.47 per cent rise in the MSCI World and the 57.09 per cent return of its average peer.
Performance has been hurt by the fund’s exposure to emerging markets, which have suffered over recent years as China’s rapid economic growth started to slow, commodity prices weakened and political risk damaged investor sentiment in the asset class. According to its most recent factsheet, the fund has 13.3 per cent in emerging markets.
But over the longer term, Geffen’s selective, high-conviction approach has paid off.
Since the fund’s launch at the start of 2002 the fund has returned 224.30 per cent - well above the 98.31 per cent advance in the MSCI World and the 89.49 per cent delivered by the average sector member.
Performance of fund vs sector and index over 6 months
Source: FE Analytics
However, this has come with greater volatility than both the index and the sector, while its maximum drawdown - which shows how much an investor would have lost if they bought at the fund’s peak and sold at its trough - is also higher on both counts.
Ben Yearsley, head of investment research at Charles Stanley Direct, says that investors in the fund should expect to see good returns followed by periods of more mundane performance as it waits for views to be reflected in the market.
“This is a high-conviction approach. When you invest in this fund, you are really buying Robin Geffen’s macro analysis and stock picking skills,” he said.
“Neptune as a house tends to go through periods of its funds doing very well then being average [because of this approach]. But when Neptune’s funds do perform they tend to perform very well.”
Neptune Global Equity has clean ongoing charges of 0.82 per cent.
