Neptune takes first and second place

Robin Geffen of Neptune Investment Management has seen off all his peers to achieve both first and second-best performance this year with his Russia and China portfolios respectively.

It is almost a bit greedy. Neptune Investment Management is lining up to have not just the overall best-performing fund of 2006, but the second best-performing one too.

What is more, they are run by the same man, Robin Geffen, managing director and chief investment officer of the company he founded a little under five years ago.

The top fund of 2006 – with just a few more trading days to Christmas – is almost certain to be Neptune Russia and Greater Russia. It is up 54.7% over the year to December 14, according to, placing it significantly ahead of current second-placed Neptune China, which is up 46.6%. Behind that are seven funds that have all notched up gains of 40% or more over the past year, and may yet overtake Neptune China. But barring a last-minute blowout, Neptune Russia’s place looks assured.

What is extraordinary is that Neptune Russia was in this place a year ago. It was launched in December 2004 and enjoyed what most people would have guessed to be an unrepeatable first-year gain of 66.2%. Not only did it repeat the feat during 2006, but Geffen reckons it can achieve terrific returns again in 2007. “We are likely to do at least 20-25% next year,” he confidently predicts.

If you want a slice of the action, you will have to move quickly. The fund is now approaching £50m in size and Geffen will close it once it reaches £100m.

There will be no end of commentators seeking to puncture his confidence. The Russian economy is narrow-based, relying almost exclusively on the boom in oil, gas and commodity prices. If resource markets go south, then the Russian stockmarket will be the last place anyone wants to be. Geffen loves this scenario being posed to him. It is the conventional wisdom, and it is completely wrong, he says.

“I love the misconceptions about the Russian stockmarket and its dependence on commodities,” he explains. “It is true that the index is 65% oil and gas. But I only have 17% of my fund in that sector.”

At the end of 2005, Geffen’s first-year gains had been spurred by the 100% rise in the price of Gazprom stock. But he took the brave decision in early 2006 to cut his holdings. Gazprom no longer features in his list of top holdings.

“At the beginning of the year I rotated out of oil and gas into consumer stocks, telecoms and even financials,” he says.

In the first few months his new purchases moved ahead quite nicely. But then came May, and the sharp market sell-off, which hurt emerging market equities far more than the developed markets. The fact that Geffen was largely out of oil and gas stocks explains why the fund is now at the top of the tables.

“In May it was oil and gas that were the worst hit,” he says. “A lot of other funds that were exposed to the sector still have not recovered their pre-May highs. But my stocks only went down half as much as the rest of the market, and from October onwards have been hitting new highs again and again.”

Geffen’s switch to consumer stocks comes from personal research in Moscow and St Petersburg. He takes a taxi out to the bleak tower-block suburbs and looks at what the locals are buying. Three years ago they weren’t buying much. But since then average Russian take-home pay has been rising at 20% a year, compared with inflation at about 7-8%.

That has left them with a lot of buying power, and prompted a mini consumer boom. “One thing I noticed on my last trip was that the shops were stocking 32 different types of beer, of which 17 were imported,” Geffen says. “Three years ago the same shop did not stock a single imported beer. It is testament to how much money consumers now have in their pockets.” So how does he play consumer growth? One stock he likes is Wimmbilldan, which, yes, was set up by two Russians who are big tennis fans – what is it about rich Russians and sport? It is the leading producer of dairy and baby-food products, although it has had a struggling beverage division. But a new chief executive was appointed who previously ran Coca-Cola’s distribution in Eastern Europe, and is now turning around the drinks business.

Amid the explosive growth in retail, Geffen says it does not make sense to try to pick the overall winner – he is buying nearly all of them. Among the food retailers, he likes X5, Seventh Continent and Magnit. Right now each has strong franchises in separate regions of this gigantic country, and Geffen is happy to play them all until the winner emerges. “In Russia, the market is growing so fast you want to hold them all,” he says. “They are increasing their earnings at around 40% a year and are on P/Es [price/earnings multiples] of just 16.”

Vladimir Putin’s legacy, Geffen adds, is the $100bn (£50bn) stabilisation fund built on windfall taxes of the oil companies. That money is being spent on infrastructure projects that will push the economy onto the next level of expansion. “Frankly, I don’t think it matters now if the oil price falls,” he says.

Even if it does, Russian oil companies can carry on making money all the way down to $6 a barrel.

The vast gas and oil reserves in Russia are well-known. What is less well-known is how Russian companies have kept a lid on costs during the great oil price rise, unlike their Western competitors.

Geffen is a particular fan of Lukoil. “It has had no increase in lifting costs over the past three years. It has stayed lean and mean,” he says. “If you look at BP, Shell or Total, their cost base has exploded. Within the oil sector, Russian companies have also been far more successful at replenishing their reserves through exploration.”

Looking into 2007, Geffen says investors have plenty of reasons to be optimistic. Russian GDP growth will be about 7.5%, faster than nearly everywhere else outside of China, where he is predicting 9.5% growth. British and American institutions are still heavily underweight emerging markets, so flows will remain good. And in Geffen you have one of the most experienced – and secure – fund managers in the business. He is 49, owns the largest chunk of equity in a business that he has no plans to sell and which, when it hits its fifth birthday in 2007, will have £1bn under management. If you can jump in before the funds close, you will probably enjoy the ride.