Citywire AA-rated Mark Martin says his refusal to resort to momentum investing has helped the Neptune UK Mid Cap fund deliver a positive return while the FTSE 250 was down in the first half of the year.
‘I’m slightly different from a lot of mid-cap investors. I don’t want to put myself in a box but I feel I’m more of a value and contrarian investor,’ he said.
‘A lot of my mid-cap peers have got an overweight in momentum while we sold these companies 18 months ago, and we are not trying to shoot the lights out.’
‘There is an opportunity now to buy quality companies because momentum has been so strong. You can buy value and quality at the expense of momentum.’
This means buying into companies with lower dividends that can grow them, rather than paying out a higher initial rate, Martin said. ‘We look for companies where cashflow is depressed and they are building towards a sustainable future.’
One of the reasons Martin’s peers have had a tough time lately was the violent rotation out of small and mid-caps into large caps in the second quarter. ‘We have seen a lot of large-cap companies move quite sharply higher and mid-caps have been hurt on a relative basis,’ he said.
However, he added that this weakness had created ‘a more fertile hunting ground’ for opportunities, especially as the FTSE 250 is not particularly cheap relative to its historical average.
The £234 million fund has performed strongly since it was launched six years ago, and is top-quartile over one, three and five years.
Over the year to the end of June, Martin has returned 20.3%, compared with 13.7% for the FTSE 250. Over three years, the fund is up by 85.3% compared with 43.2% for the benchmark, and it is top of the IMA UK All Companies sector over this time frame, more than doubling the 34.3% peer group average.
In spite of steady GDP growth and improving Purchasing Manager’s Index numbers, Martin predicts headwinds for the UK economy. ‘Longer term I am very risk conscious,’ he said. ‘There are obviously clouds on the horizon.’
The manager has been ‘trimming’ his position in AG Barr, the manufacturer of popular Scottish drink Irn-Bru, and the fund’s seventh largest holding at the end of last year, ahead of the independence referendum in September.
He also noted that IPO volumes in the mid and small-cap spectrum are at record levels, which is another potential warning sign. ‘There are reasons to be concerned. Small and mid-cap IPO volumes in 2006-07 coincided with the market top. There are signs the IPO market is pretty hot right now.’
He advised investors who are universally positive about the state of the economy to look elsewhere.
‘If you are a little bit cautious about the market right now, the fund is a good place to be,’ he said.
‘If you are extremely bullish you might want to look elsewhere because we have struggled to perform in relative terms when the market has rippled higher. If the FTSE doubles, I may double but if it halves, hopefully I won’t halve.’
Although he is concerned about the strength of the IPO market, he said it has thrown up some investment opportunities in the FTSE Small Cap index, where he will consider the 50 largest companies.
‘We are seeing areas of value in companies that have been pushed down from the FTSE 250 by these IPOs,’ he said.
‘The likes of AO World have pushed out some out-of-favour companies offering an attractive
The fund currently has 36 holdings and Martin believes in a concentrated portfolio as he wants to ‘back Neptune’s in-house research and not diversify it away’.
The portfolio has a bias towards healthcare and consumer staples, with a marked underweight in financials, which the manager said looked relatively expensive in the mid-cap sector.
Martin has also become ‘a bit nervous’ on pure housebuilders, and sold out of them completely last year in favour of housing suppliers, including Marshalls, a manufacturer of stone products.
‘Housebuilders have benefited from capital discipline and regulated the housing supply, and that is not what the UK economy needs. There is a risk the politicians turn against housebuilders to the benefit of companies like Marshalls.’