M&G’s Richard Woolnough walked away with FE Alpha Manager of the Year award for the performance of his highly-popular bond funds – in relation to their risk-adjusted alpha; consistency of outperformance versus their benchmark; and outperformance in both up and down markets.
All in all, 15 awards were handed out recognising the best FE Alpha Managers across sectors and styles and the individual who took home the best high conviction manager award – which is arguably one of the most important given as it was a celebration of active management – was Mark Martin.
For those who don’t know, Martin is fast becoming one of the hottest prospects in the UK equity sectors.
He launched his five crown-rated Neptune UK Mid Cap fund in December 2008, over which time it has been a top decile performer in the IA UK All Companies sector and more importantly beaten its FTSE 250 ex IT benchmark with returns of more than 300 per cent, according to FE Analytics.
Performance of fund versus sector and index since December 2008
Source: FE Analytics
It isn’t too difficult to see why he was handed the best high conviction award, given that he has historically run a very concentrated portfolio – he currently holds just 38 stocks – and he has an active share of more than 95 per cent.
The major reason why Martin is so highly rated within the fund management industry is because he has a disciplined approach to the market.
He splits the portfolio into three ‘silos’ – recovery, which are companies that should do well if economic conditions improve; structural growth, which can perform well no matter the economic conditions; and self-help stories, which are mainly of out of favour stocks Martin thinks have the potential to turnaround.
As he will always hold at least 20 per cent of his fund in each of these three ‘silos’, his fund is differentiated from most of UK mid-cap funds as the manager prioritises downside protection.
This has certainly worked in the past as while the fund has tended to lag behind its benchmark in strongly rising markets such as 2009, 2010 and 2013 Martin has come into his own in flat or falling markets.
Data from FE Analytics shows, for example, that Neptune UK Mid Cap was up 11.86 per cent last year while the FTSE 250 ex IT made just 2.79 per cent. In 2011, when the European sovereign debt crisis intensified and the index fell more than 10 per cent, Martin delivered a 3.65 per cent gain to his investors.
Performance of fund versus sector and index in 2011
Source: FE Analytics
There is little doubt that Martin’s past performance has been impressive, but there are two questions which have to be asked when it comes to his fund.
Firstly, given that the large majority of private investors will only hold a select number of funds within their portfolio – how many are realistically going to allocate one of their choices to a designated UK mid-cap fund?
“Your point about why invest in a dedicated 250 fund is a valid one. After all, if you only have room for one or two UK funds in a portfolio then you are probably going to go for flexible all cap funds,” Charles Stanley Direct’s Rob Morgan said.
“Given that he is a young manager with a small and nimble fund I do think it is worth considering – but it is probably fair to say he is far better known in the industry than with retail investors thus far.”
Morgan’s point is also possibly reflected in the fact that Neptune UK Mid Cap, despite its strong and decently sized track record, is still sub £450m.
The second question is a more contentious one – if investors did allocate to UK mid-caps, would they want to choose one which takes a more cautious approach?
There is no right or wrong answer to this question, of course, but if investors were genuinely bullish on the prospects of a more niche asset class, region or part of the market, then the chances are they would want to a choose fund that makes the most of a rising market as it is more often than not geared into a rally.
The likes of Schroders’ Marcus Brookes and Coram’s Martin Gray and James Sullivan argue a similar point when it comes to picking funds. They choose funds which can make the most as possible out of their asset allocation decision otherwise they see little point in making such a conviction call.
While Morgan prefers Martin’s “through the cycle” approach to mid-caps rather than higher beta funds which perform well in the good times, he can certainly understand this point of view.
“It is probably the case that there are higher octane mid-cap funds for those making a shorter term asset allocation call on this area of the market,” Morgan said.
If investors have overlooked Martin’s fund because of either of those two issues, they may be interested to know that the star manager has just taken charge of the Neptune UK Opportunities fund.
It is a multi-cap fund, which is a strategy that is becoming increasingly popular with investors who want to leave their asset allocation decisions within the UK market to the experts.
The £70m fund, which was managed by Alex Breese then Scott MacLennan before Martin took the reins last month, has comfortably outperformed both the IA UK All Companies sector and the FTSE All Share since its launch in December 2006.
Performance of fund versus sector and index since Dec 2006
Source: FE Analytics
There will be the inevitable concerns about whether Martin will be able to translate his so-far successful investment approach into the large-cap arena, but is this a good opportunity for investors to buy a highly rated manager they may have once been forced to overlook?
Given Morgan rates Martin as one of the best stockpickers around, he thinks his new fund is an interesting proposition.
“I would take a look at it as I think he can apply his process over the whole market spectrum,” Morgan said.
As a recent FE Trustnet article highlighted, Martin is hard at work moulding the portfolio to his liking by putting together his best ideas within the UK market.
The manager has already trimmed the tail of the fund to make it more high conviction and made it a more concentrated portfolio, bringing the number of holdings down from 51 when he took over to below 40 today.
Martin also pointed out he was differentiating his UK Opportunities fund from his UK Mid Cap portfolio.
“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,” Martin said.
Nevertheless, Whitechurch’s Ben Willis – who, conversely, is considering using Neptune UK Mid Cap – says he is avoiding Martin’s new offering for now. While Willis rates the manager very highly, he currently prefers other UK multi-cap funds.
“He has only taken on UK Opportunities recently and whether it will be truly multi-cap, I don’t know,” Willis said.
“I’m sure he will be able to adapt his style to large and small-caps, but I have a funny feeling the fund will have heavy weighting towards mid-caps. But that makes sense given his record in mid-caps has been pretty damn impressive.”
It must be noted, however, that Martin has already added large-caps such as AstraZeneca, Rolls Royce and Johnson Matthey to his Neptune UK Opportunities fund.
Clearly, now Martin is running his new portfolio, this could well be a good time to buy a young but very highly-rated fund manager who has the whole UK market to choose from and a very nimble amount of money to work with.
Time will tell whether he will be able to adapt his style outside of the FTSE 250 and many may want to wait and see to find out. But Morgan is confident that Martin will continue to outperform.
“If you were a assembling a portfolio of ‘stockpickers’, Mark Martin would be up there,” Morgan said.