An evenly-balanced portfolio across sectors and geographies is the best way that investors can reduce both dividend and capital risk, according to Neptune Investment Management’s Robin Geffen. 
The Neptune founder and chief executive (pictured) said most income funds take high capital risk by having sector concentration, something he always tries to avoid.
“I am never going to be the number one fund, but I don’t want to, I don’t want to take the risk associated with it,” the manager of the £197.9m Neptune Income fund said.
“I have 33 equally weighted stocks and I put them in three even silos. These different buckets are not correlated with each other and, between them there is no correlation with the FTSE All Share, so we are diversifying all the time.”
This diversification across sectors, he said, has worked well so far in 2018.
Although diversified, the portfolio is overweight IT, materials and financials in comparison with the FTSE All Share.
“We are well-diversified across the portfolio, we are overweight IT, materials and financials. We have no real estate and no telecoms, I hate telecoms,” he explained.
“I have also used 1 per cent of the cash to buy some index-traded puts on the FTSE which run until March 2019. These puts act as a nice little cushion on the portfolio.
“I am nervous, we have had setbacks in the market before and we will continue to have them.”
He added: “When looking at which holdings to add we put the UK in the context of the global economy and find global companies and drivers of competition. We currently have around 19 per cent invested in overseas equities.”
The fund is structured into three different buckets or “silos” with 11 stocks in each of them.
‘Hidden fruits’
The veteran manager described the value part of the portfolio as ‘hidden fruits’, stocks where he has identified a catalyst for change.
“The capital performance of these stocks can be more volatile, they carry more beta,” explained Geffen. “They trade at low valuation, but they also offer significant upside.
“The yield part of the hidden fruits in the portfolio is actually higher than the sector average yields.”
He added: “They deliver 38.63 of the fund’s yield they have a dividend cover of 1.64x, a huge upside capture.”
One example of a ‘hidden fruit’ of great importance in the portfolio is the Chilean copper mining group Antofagasta, which, unlike some other pure copper producers that have stock-specific difficulties, has stable management and a strong balance sheet.
“Antofagasta has started paying a dividend like the big miners because they are displaying a wonderful capital discipline,” he said. “Ten years ago, you wouldn’t see them paying dividends but now when they make profits the first thing they look at is getting some money back to shareholders.
“This company came from nowhere to a 4 per cent yield and for them the shareholder is now the king, not the chief executive.”
‘Steady eddies’
The next bucket in the Neptune Income fund consists of 11 “steady eddies”, core income stocks with a five-year income growth track record.
These stocks, Geffen noted, have produced lower beta and greater resilience against market drawdowns yielding over 2 per cent.
“These offer a 21.63 per cent contribution to the fund yield, have a good dividend cover, a low pay-out ratio, a good three-year beta and stability in market drawdowns,” he said.
One example of in the portfolio is consumer goods company Reckitt Benckiser.
Performance of stock over 3yrs
Source: FE Analytics
“Reckitt Benckiser has a unique exposure to consumer health, it is one of the fastest-growing and highest-margin, fast-moving consumer goods category globally. It should drive 5 per cent long-term growth,” he noted.
Other attractive aspects, he said, are the company’s strong position in China and its lean operating structure.
“We like Its ability to generate strong free cash flow: 50 per cent of earnings go back into the business for growth,” the manager of the four FE Crown-rated Neptune Income fund added.
Tactical plays
The final bucket in the portfolio consists of a tactical overlay which Geffen said reflects Neptune Investment Management’s views. He spreads it properly across sectors to get diversity.
As the veteran manager noted, tactical plays are those companies that offer an attractive yield. Some examples in the portfolio include US data communications & telecommunications equipment provider Motorola Solutions, private equity and venture capital company 3i Group and banking services provider SunTrust.
Oil and gas giant Royal Dutch Shell is one example of a tactical holding in the fund.
“Royal Dutch Shell are keen on share buy backs, they have a very good position in liquified natural gas [LNG] where they are global market leaders,” said the Neptune founder.
“Shell are doing really well globally and if you wanted to find a global oil company that is well-positioned, and wanted to hook onto liquefied natural gas, Royal Dutch Shell is the place to go.”
Over five years, Neptune Income is up by 37.12 per cent compared with a 28.04 per cent gain for the average fund in the IA UK Equity Income sector and a 29.17 per cent gain for the FTSE All Share index.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 0.86 per cent.