Long-term investors should maintain an allocation to equities and avoid so-called ‘diversifiers’ such as property and absolute return strategies, according to Neptune Investment Management founder Robin Geffen. 
Geffen (pictured), who manages the £452.3m Neptune Balanced fund, said all investors now have to consider themselves as long-term investors but will need to take on more risk to achieve their desired returns.
“There are an awful lot of people who are currently in the long-term savings market whether they like it or not,” said Geffen.
He said the shift from final salary – or defined benefit – pension schemes to defined contribution schemes had created a shortfall in pension pots.
The Neptune founder said many people were unlikely to have enough savings to retire when they reach state pension age.
However, some of the targeted absolute return funds sold in expectation of delivering in any market condition have not always performed, he said.
“Another hazard out there – a moral hazard, if you like – is that are some very poorly performing target risk funds, including the targeted absolute return funds which have done very badly,” said Geffen.
Over the past three years, the average IA Targeted Absolute Return fund has delivered a 4.36 per cent total return compared with a rise of 5.59 per cent for the UK consumer prices index (CPI), according to the most recently available data. It should be noted, however, that the sector is home to range of strategies focused on different asset classes and geographies.
Performance of sector vs index over 3yrs
Source: FE Trustnet
He explained: “We have this dichotomy with targeted absolute return funds because despite them having been the best-selling sector in 2016-17, [investors say] it doesn’t have a place in long-term pension portfolio.
“One has to wonder who is really buying them and how happy they are having them.”
Geffen said funds with significant equity exposure have delivered consistent returns above inflation over a longer period.
However, concerns have grown that markets could be heading for a downturn as central banks begin to unwind the extraordinary monetary policies and ultra-low rates in place since the global financial crisis.
The Neptune manager noted that bonds were unlikely to continue delivering the kind of returns investors have grown accustomed to.
“This is the moment where bonds become the ‘bad guys’ and anybody relying on bonds behaving over the next 10, 20, 30 years as they have over the past 10, 20, 30 years is in for a very unpleasant shock,” he explained.
Indeed, Geffen pointed out that in the market correction witnessed at the start of the year, bonds had sold-off at the same time as equities – posing questions of the diversification benefits of bonds. As such, the manager said he prefers to use put options to hedge against short-term equity market drawdowns.
Fund managers have become increasingly wary over the prospect of a market correction as central bank support is removed from the financial system.
London-based consultancy Capital Economics has forecast a US market correction for 2020,while managers are becoming increasingly bearish about the global economy.
Whenever the market correction happens, however, the Neptune manager said it was unlikely to evolve as many expected.
“One or two investment banks came out and decided that there was going to be a sell-off in the market in 2020,” said Geffen. “I think the one thing we can be sure about is that it won’t happen in the way they tell us it will.
“They expressed the view that flash trading will be the culprit next time, not the banks. I’m of the very definite opinion that the next move down in markets will be heavily exacerbated by ETFs [exchange-traded funds] and ETNs [exchange-traded notes], both of which – in my view – are inadequately regulated compared to the rest of the industry.”
Global exchange-traded product assets
Source: BlackRock
Indeed, the Neptune Balanced manager noted that the most recent market correction earlier in the year was caused by the collapse of two volatility ETNs.
“Just because something is called an ETF or an ETN, it doesn’t give it a God-given right to go up and always be profitable,” he added. “The fact is that there is a much higher turnover in ETFs and ETNs than in equities themselves or in funds.”
Another asset class Geffen warned against for long-term investors is property – given that the typical balanced fund has around 5 per cent exposure – noting several challenges for the sector.
“We have zero per cent, we always have had zero. We don’t consider it to be a good diversifier,” he said. “Fifty-one per cent of UK savers net wealth is now tied up in real estate and that compares to 41 for the rest of the Europe.
“If you think about it, many of the people approaching retirement are empty nesters and are about to downsize. So, loading them up with property in any kind of long-term pension fund when they’re reaching retirement is practically a criminal thing to do.”
Geffen said the property market is also at a turning point given the large levels of supply following a recent boom in construction, much of which is unsold and unoccupied.
He explained: “There is an enormous amount of construction going inside of London this is not social housing it is expensive housing.
“You can drive up and down the [Thames] Embankment and go down as far as Wandsworth or beyond along the river after dark and you will find very few lights on because a lot of the properties that have recently been completed have not been sold.
“They’ve not been sold and it hasn’t seemed to matter for the past five years because it’s been incredibly cheap for property companies to carry those on their balance sheets.”
However, he warned that normalisation of interest rates under Bank of England governor Mark Carney is likely to put pressure on developers to offload unsold stock.
“The point comes at which property companies can no longer afford to carry those unsold properties on their balance sheets and the banks move in to insist that they are paid back,” he said.
“So, property – in many senses – is an even worse diversifier than bonds because they’ve got enough of it already and it is an extremely expensive asset.”
Geffen’s Neptune Balanced fund has delivered a total return of 681.45 per cent since launch at the end of 1998, compared with a 160.82 per cent gain for the average IA Mixed Investment 40-85% sector fund.
Performance of fund vs sector since launch
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 0.87 per cent.