Lipper’s Moeller analyses the Neptune Global Alpha Fund

Jake Moeller, head of research UK & Ireland at Lipper reviews highlights of a meeting with Robin Geffen, fund manager & CEO; James Dowey, CIO; and Douglas Turnbull, investment director at Neptune Investment Management.

For many fund selectors it was inconceivable for a Neptune fund not to be included in a model portfolio. Robin Geffen–presiding at the helm of one of the UK’s best known and most successful boutique fund houses–had built a popular suite of high-alpha and innovative funds. In 2013 lacklustre performance in a number of flagship offerings saw Neptune relegated off approved lists and fall out of favour with investors. Neptune’s fortunes had turned, and–unusually–the industry-friendly voice of Mr. Geffen was somewhat dampened.

Today, there is clearly a sense of re-invigoration in Neptune’s Hammersmith offices. Mr. Geffen has overhauled a number of fund functions, including sales stewardship, with the innovative appointment of Charlie Parker from Citywire. Key to the investment revival, however, is the formation of a sector analyst pool that has considerably strengthened Neptune’s process. An influx of highly credible analysts, appointed from senior positions externally (rather than being brought through the graduate ranks), has augmented existing intellectual capital and relieved some of the pressures of distilling news flow–so key to the Neptune process–into a more effective and efficient process. The analysts now specialize on “sector pools,” constantly running a model portfolio of their preferred shares. “Even when a sector is out of favour with the portfolio manager,” states Mr. Geffen, “I know that up-to-date and researched recommendations are ready to go should our view suddenly change.”

While these changes auger well for Neptune generally, Neptune Global Alpha has quietly gone about generating consistent outperformance while staying off the radars of fund selectors distracted by other events. Managed by Mr. Geffen himself, and despite its compelling track record, this fund with only around £90 million of assets has been overshadowed by larger Neptune Global Equity. “The retail market has changed now,” states Mr. Geffen. “Ten years ago investors were interested more in ‘core’ offerings. Today these have been replaced by index trackers, and there is more demand for active satellite options.”

Neptune Global Alpha is a highly concentrated portfolio typically containing 30 to 50 stocks. It sits within the IA Flexible investment sector; it has an unconstrained mandate, a multi-cap remit (typically maintaining a mid- and small-cap bias), and regular large sector biases. Mr. Geffen is quite prepared to use cash at high levels and has done so with some success. In 2008 the fund reached 45% cash as the global financial crises unfolded. Similarly, financials exposure, which had reached over 40% of the fund in 2005, had presciently been lowered to around 15% by that time. Today, the fund has some punchy positioning, with 33% exposed to Japan, 61% to the U.S., and the remainder to emerging markets and Asia.

Table 1. Five Year Percentage Growth of Neptune Global Alpha within IA Flexible Quartiles

Table 1 Neptune Global Alpha Quartile Performance

Source: Lipper for Investment Management. Past performance is no guarantee of future performance.

Mr. Geffen has been moving into Japan since 2013, commensurately reducing his exposure to emerging markets, and cites the tightening Japanese job market, property reflation (manifesting in stocks such as property developer Mitsui Fudosan), and the strong political mandate of Prime Minister Abe as boosting corporate earnings there. His U.S. exposure is largely a play on economic recovery and domestic consumption. He likes XPOLogistics, which is well positioned in the high-margin logistics business and high-quality players in the buoyant M&A market such as Evercore. His exposure to emerging markets now consists almost entirely of Chinese Internet stocks that are able to benefit from the boom in on-line retailing.

Despite this fund having considerable active positioning, there is an emphasis on stocks with quality characteristics, which gives the portfolio some resilience in down markets. Neptune’s CIO James Dowey puts recent market volatility into context: “The ‘China crisis’,” he states, “is a crisis of an atypical domestic stock market dominated by retail investors. Our Japan exposure is insulated by inelastic Chinese tourist demand for shopping, for example, whilst our U.S. focus on domestic consumption and earnings rather than merely looking at ROE provides more resilience in a re-rating.” Together with its quality bias, the fund currently has a relative overweighting to consumer, discretionary and staples, health care, and IT. It is underweighted in energy and materials, a position which has also been a positive contributor to performance since 2013.

Table 2. Performance of Neptune Global Alpha against Peer Group & Market Index from Inception (to Aug 31, 2015)

Table 2 Neptune Global Alpha Inception

Source: Lipper for Investment Management. Past performance is no guarantee of future performance.

Neptune does not see the current market volatility as a reason to abandon equities and remains reasonably sanguine on the medium-term outlook. The company believes the current environment is a healthy shake-out for some areas of the market where valuations were becoming stretched. Neptune’s Investment Director Douglas Turnbull believes China can stabilize in the next few months and that the Fed will likely wait for this before increasing rates: “The market reacted very badly to the PMI number,” he says, “but we saw a robust monetary policy response, a robust fiscal policy response, and the Chinese government has recognised its ill-conceived attempts to prop up the A-shares market.”

There are many reasons for fund selectors to revisit Neptune. There have been material, positive, and innovative changes in response to some of the challenges it has faced recently. Mr. Geffen has diffused much of the key-person risk associated with his name and has re-invigorated his team structure and introduced new talent. Despite some medium-term indifferent numbers, things are improving, and there remain a number of funds in the Neptune suite with a strong long-term pedigree.

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