Geffen (pictured), who has been negative on the outlook for the UK for some time, has continued to rotate out of stocks with a high level of exposure to the UK domestic economy and into those with greater overseas earnings.
“We believe the economy is fundamentally weak and getting weaker,” said Geffen. “The stocks we remain in are very much those that are not dependent on the domestic economy.”
The outlook for the UK economy has become more uncertain as consumer-fuelled economic growth begins to run out of steam, a view held across the investment house.
James Dowey, chief economist and CIO at Neptune, said: “We see the UK economy slowing sharply from here. We think this is likely to dominate the UK investment landscape for the rest of the year as opposed to the dominant role of politics in recent months.”
Source: Office for National Statistics, OECD
Dowey said other major developed economies such as the US, those in continental Europe, Japan and even China were showing much stronger signs of growth.
“Hence, we favour globally-sourced earnings and globally-sourced dividend streams in this fund and we’re very bearish on sterling looking forward,” he said.
Dowey said the inflationary effect of the EU referendum result and low wage growth were affecting consumer confidence.
Further action by the Bank of England to tighten credit conditions were likely to have an impact on consumer spending, which has been the main driver of the economy over the past nine months, he added.
The Neptune chief economist said there was also greater uncertainty weighing on business investment as detail over future trade agreements for the UK economy remained unclear.
He added: “There has been some speculation of a rate rise and the market is now pricing in a 50 per cent chance of this by the end of the year.
“We think this is very unlikely because inflation is being driven by import prices not domestic conditions.
“We expect the Bank of England to look through inflationary episode – just as it did in 2011 and 2012 when import prices pushed inflation up to 5.2 per cent – and as growth slows further over the course of this year we expect the speculation of rate hikes to dissipate and expect downward pressure on sterling during the second half of the year.”
Increased pessimism over the UK economy prompted Geffen and deputy manager George Boyd Bowman to make several changes during the first quarter of the year and they continued to do so in the latter three months.
“In the second quarter, we further increased our exposure to IT by buying Sage Group,” said Geffen.
“It is a massive underappreciation of some of the more mature tech companies like Microsoft in the US, Sage in the UK. We also bought Croda International in the materials sector. Croda produced some excellent results and increased dividends after that.”
Despite taking a more bearish view on UK banks, Geffen retains a position in FTSE 100-listed HSBC, which he sees as more of a play on Asian markets, in Neptune Income.
Performance of HSBC over 3yrs
Source: FE Analytics
“It’s a little appreciated fact that 41 per cent of the earnings of HSBC actually come from Asia, [instead] people talk a great deal of earnings from UK and US,” he explained.
“Its Asia earnings have fallen in the order of 10 per cent in past three years. The consensus was that earnings would go down another 10 per cent but we felt they were going to rise by 10 per cent and so far they have done.
“The first set of quarterly earnings that came through saw an increase in dividend increase in earnings and much of that is down to Asia.”
As well as HSBC, the fund also owns two US banks as part of its overseas exposure, where deputy manager George Boyd Bowman said there are signs of improvement.
“US financials and financials as a sector is the one we’re most bullish on deregulation. The reason we are much can be done with congressional approval. Instead the Trump administration can replace many of the heads of supervisory bodies which set the tone for how regulation is implemented,” he explained.
“We think there’s going to be an end of so-called ‘gold plating’ of US regulation of banks. For a while the US has brought in much tougher regulation than global ones. When rules enacted on global basis us would go much further and ultimately seen as unfairly penalising US banks.”
Recent actions by the Federal Reserve have also helped Neptune Income’s two holdings JP Morgan and Wells Fargo, allowing them to participate in increased share buybacks and increase dividends.
Elsewhere, Geffen said he remains underweight in utilities sector as UK politicians continue to make noise about the regulation of energy prices. He also holds no stocks in the property or housebuilding sector, reflecting ongoing challenges for the sector.
During the first half of the year Neptune Income rose by just 4.37 per cent compared to a 6.78 per cent gain for the average IA UK Equity Income fund, and a 5.5 per cent rise in the FTSE All Share benchmark index. However, Geffen remains sanguine about its performance.
“We appreciate that, relative to the competition, the last two quarters haven’t been the strongest but look at return over one year and we continue to be well ahead and comfortably top quartile and nearly 4 per cent of the FTSE All Share,” said Geffen.
“If we look at performance over one year we are up 22.36 per cent against a sector return of 19.37 per cent and over that period the FTSE All Share has done 18.12 per cent.”
Performance of fund vs sector & benchmark over 1yr
Source: FE Analytics
He added: “The dividend currently stands at 4.61 per cent yield on the fund, which is pleasing. We continue to believe and will continue to run the fund on the basis that we launched it on and sell it on.
“We’re committed to producing a yield that we believe an income fund should: 110 per cent of FTSE All Share, a yield of somewhere around 4.3 per cent. We believe that is doable and achievable and that is what our clients want.”
The fund has an ongoing charges figure of 0.83 per cent.