The manager, Neptune’s head of UK equities, assumed control of the £67.8m Neptune UK Opportunities fund last week, taking over from Scott MacLennan. Martin had previously been assistant manager of the portfolio.
Neptune UK Opportunities has a multi-cap remit. Martin (pictured) and assistant manager Holly Cassell are using this to look for opportunities among the UK’s largest companies, with research support from Neptune’s UK equities team and global sector specialists.
“We are seeing lots of opportunities in FTSE 100 companies so for me it’s a great opportunity to take the best ideas of UK Mid Cap and combine them with our best ideas from the FTSE 100. It gives me even more flexibility to invest in the most interesting, undervalued companies,” he told FE Trustnet.
The FTSE 100 is seen by some analysts as being a more attractive part of the UK market on valuation grounds, following its recent underperformance against the FTSE 250. Barclays Wealth and Investment Management head of equity strategy William Hobbs, for example, recently noted that the FTSE 100 looks cheap relative to its own history and said investors could want to start adding to this part of the market.
Performance of indices over 2yrs
Source: FE Analytics
Martin is reluctant to be drawn into a debate on the FTSE 100’s valuation versus the FTSE 250’s, but said: “We finding selective opportunities across the market-cap spectrum. There are parts of the market that look richly valued but there are other parts, and particularly individual stocks, that are fairly cheaply valued. We think that creates opportunities to generate significant alpha.”
The manager’s restructuring of Neptune UK Opportunities is “still a work in progress”. One of the first moves has been to add pharmaceutical giant AstraZeneca to the portfolio.
“One of the things we believe is the quality of British science,” he explained. “Britain leads the world in many respects in high-end science and industrial engineering. Companies like AstraZeneca spend a lot of money on very smart people who are now discovering genuinely innovative drugs.”
AstraZeneca’s share price took a recent hit after its fourth-quarter results showed a significant rise in costs, caused by increased research and development (R&D) spend among other things. While this seems to have put off some investors, it is this effort to boost the drugs pipeline that attracted Martin to the business.
Performance of stock vs index over 3 months
Source: FE Analytics
“One theme is companies that continue to invest. It feels to me that shareholders are putting a lot of pressure on some companies to turn off the cap-ex and R&D taps. That helps short-term returns but, if the long-term aims of the business are to be met, cap-ex actually needs to be increased,” he said.
“To my mind it’s a dangerous game to play – especially if you’re a long-term shareholder – trying to juice short-term returns by forcing management to cut back on cap-ex. Ultimately, that’s a value-destructive tactic.”
Other holdings that fit into this theme include engineering group Rolls Royce and speciality chemicals and sustainable technologies company Johnson Matthey. Martin has added both since taking over Neptune UK Opportunities, describing them as examples of companies that are spending a lot of money on R&D with strong managements and strong balance sheets”.
“We’re looking to invest in companies where the free cash flow generation has been weak – importantly, on a temporary basis – because companies have been investing in cap-ex and R&D,” he said.
“We’re trying to look through short-term weakness and invest for the longer term. I think the market has taken a dislike to the fact that cash flow has temporarily fallen due to cap-ex across these companies. But after conversations with these management we have a high degree of confidence that it’s only a temporary fall in free cash flow generation.”
The addition of AstraZeneca to the portfolio has pushed up its allocation to healthcare from 15.4 per cent. The firm sits alongside GlaxoSmithKline in its top 10 while it also has holdings in Vectura and Consort Medical, which make treatments for respiratory illnesses.
The weighting to industrials is also expected to rise, from 21 per cent to around 25 per cent.
To create room for purchases, Martin has trimmed some smaller positions from the fund, including IT services company FDM Group, financial services technology firm Tungsten Corporation and textile services business Johnson Service Group.
“One of the first things we did was to trim the tail of the fund. There were quite a lot of small positions in some very small-cap companies that were fairly low conviction and we have cut those out,” the manager said.
“We want to make the portfolio more concentrated and more focused. We’re aiming for somewhere between 35 and 40 stocks in the fund; there were 51 when I took over.”
Neptune UK Opportunities currently has 42 positions and the manager expects this to fall down below 40 during the coming few days.
Martin has built up a strong reputation as manager of the five FE Crown-rated Neptune UK Mid Cap fund, which has attracted attention for its strong relative performance in down markets. Both funds currently have about 20 per cent overlap, although this is expected to rise to up to 35 per cent in time.
However, Neptune UK Mid Cap is very much a mid-cap portfolio that can also invest in the 50 largest small-cap businesses. Neptune UK Opportunities, on the other hand, has a multi-cap approach and, as shown above, has exposure to the market’s largest companies.
As the graph below shows, Neptune UK Mid Cap has returned 294.69 per cent since it launched in December 2008 compared with a 241.30 per cent gain in the FTSE 250 and a 124.49 per cent average return from the IA UK All Companies sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
It’s currently the top performing fund in the IA UK All Companies sector over three and five years but it’s the performance in more challenging markets where it stand out. The fund made 3.65 per cent in 2011 when index dropped 10.30 per cent and 11.86 per cent in 2014 when mid-caps rose just 2.79 per cent – putting it first decile in both years.
Other metrics also highlight Martin’s focus on capital preservation. Although the fund’s annualised volatility since launch is slightly higher than the sector average at 14.38 per cent, it’s less than the benchmark’s; meanwhile, its maximum drawdown 10.01 per cent compared with 15.23 per cent from the sector and 18.50 per cent from the FTSE 250.
Neptune UK Opportunities has a clean ongoing charges figure of 0.87 per cent, while Neptune UK Mid Cap’s OCF is 0.82 per cent.