Team play sees Neptune ride storm

Having a team-based investment approach has helped Neptune weather the current economic crisis, so much so that it is on the look out for potential acquisition targets, writes Tomas Hirst.

Neptune Investment Management was founded in 2002. The firm is based in London and three-quarters of the company is owned by its employees and directors. It has £3.4 billion in assets under management.

Neptune’s performance has suffered over the past year but investors remain confident in the group’s team-based approach to see it through the crisis.

Of the 16 funds with a one-year track record, six have fallen into the bottom quartile over the past year. Despite this, of the 11 funds with a three-year track record only three are outside of the top quartile, with none lower than second quartile.

Robin Geffen, the managing director, says a key strength for the group is that while other members of the industry are embarrassed about labelling themselves boutiques, Neptune revels in the title.

The entire team, comprising 21 people, works out of the company’s office in Hammersmith and, Geffen says, a key motivation is that they all have stakes in the future success of the company.

“Everyone sitting around the desks here participates in the equity,” he says. “But it’s not enough to have equity, you have to have successful equity, and we’ve grown 30% over the year at a challenging time.”

Growing Neptune’s asset base meant that while share prices across the rest of the financial sector plummeted, the group saw an improvement in its shares last year.

The competitive advantage, however, is not simply derived from the equity incentives but from the team-based investment approach, which is adopted in the management of the funds.

“The team approach goes across the board and it’s enormously helpful during challenging times to be able to discuss things with your peer group who have an active interest in your success,” says Geffen.

He says the success of the approach is the reason why the team is concentrated in a single place, under the same time zone, so that these kinds of discussions are facilitated.

This has helped funds such as the Neptune US Opportunities fund, which is top of its peer group over three years producing a return of 23.66%, compete with larger asset management groups that have operated in America for many years. The average fund in the Investment Management Association (IMA) North America sector lost 13.27% over the same time period.

“Our edge is that we look at the world in the round as all of the team join in all of the meetings,” Geffen says.

“Felix Wintle [the manager of the US Opportunities fund] gets advice from people such as Rob Burnett and his team and that is very helpful in forming decisions.”

Jonathan Wallis, the head of retail fund research at Allenbridge Group, says this process forms the core of investors’ confidence in the group.

“We’re big fans of Neptune and we like its process,” he says. “It has suffered over the last year because of their exposure to emerging markets but I think it is following the right approach for the long-term.”

While Neptune was much lauded for its emerging market propositions with funds operating in China, India and Russia, it is keen not to be seen as simply an emerging markets proposition. Geffen points to the success the group has enjoyed in mainstream investment arenas such as American, Japanese and European equities and equity income, which have been key for investors.

The Japan Opportunities fund, managed by Chris Taylor, has been of particular interest to investors as the fund has returned 90.51% over the past 12 months against an IMA Japan sector average loss of 7.66%.

“Our Japan fund has more than doubled in size over the past six months and as [Japan] becomes more widely owned I would expect the fund to double again in size by the end of the year,” Geffen says.

Part of this switch of the limelight away from the emerging markets offerings has to do with the battering that many of their stockmarkets took as the crisis hit last year. Worst hit in the crisis was the Russia & Greater Russia fund which, after producing a return of 110.99% over two years from the start of 2006, dropped 59.21% over 2008.

Geffen says the area has seen a lot of growth over the past five years and closer ties with its neighbours in the east, including an oil deal between China and two of Russia’s largest oil companies worth $25 billion (£15 billion), should mean a return to solid growth in the future.

However, volatility in the country’s stockmarkets means Russia should be seen as a longer-term investment proposition.

“We actually stopped advertising the Russia fund after the strong performance in 2006 as we didn’t want to get a lot of hot money coming into the fund,” says Geffen.

Ben Yearsley, an investment manager at Hargreaves Lansdown, says the recent dip in performance of some of the range should not be enough to dissuade investors from investing their money in the group.

“We like Neptune and have a lot of its funds on our
recommended list,” he says. “It has had a lot of funds performing well, so I don’t think we’ll see investors taking money out.”

While in absolute terms the Russia fund was the group’s worst performer over one year, it’s strong three-year track record has meant that it has still produced a positive return of 13.67% over three years. The Neptune Income fund, however, is a sorer point having been pushed into the IMA’s newly created equity income and growth sector in March, along with 17 other funds which formerly sat in the UK Equity Income Sector.

The move split opinion in the industry over how necessary the IMA’s action was and Geffen, who manages the Income fund, says a performance comparison bet­ween his fund and its new sector has now been rendered useless.

“I think the IMA’s creti­nous antics have been nothing short of disastrous,” he says. “Anyone like us who didn’t own banks last year looked like their nominal yields were significantly lower than those who did. Many of these companies, however, haven’t paid their dividends and some have had debt for equity swaps where the equity halved
in value.”

Confusion surrounding dividend payments last year meant that the Neptune Income fund failed to meet the income target of 110% of the FTSE All-Share necessary to remain in the UK Equity Income sector.

While the yield target in the new sector is lower at 90% of the FTSE All-Share the switch has left the Neptune fund competing against funds which target both growth and income, while Geffen continues with his income focus.

Wallis says the change of sectors has done nothing to dampen his enthusiasm for the fund, and he continues to recommend it to retail clients.

“I mean it’s still the same fund and it still pays a reasonable income,” he says.

Yearsley agrees and says he has some sympathy with managers but now that rules are in place it is its choice which sector it chooses to slot itself into.

“I do think it’s daft having two sectors. It should have just relaxed the criteria of the Equity Income sector,” says Yearsley. “That said it has made the rules and you can choose which sector you want to be in by following them.”

Despite the controversy, Geffen says the prospects for the sector are starting to look compelling.

“For investors in the UK yields on equities look pretty sustainable and there is good growth potential,” he says.

“If you look over the last six years at the funds which have always been in the first and second quartile, there are only six of us, so consistency in this market is a rare commodity.”

After a strong year, the group is looking for potential targets for acquisition as some members of the industry are still reeling from the past 18 months presenting a couple of attractive bargains. Already big names like New Star and Credit Suisse have been swallowed up by former rivals in a period of consolidation for the industry, and Geffen says there could be more to come.

“Many of the boutiques were highly leveraged, but we are sitting on a large amount of cash and are in a situation where if an attractive opportunity comes up we could move in,” he says. “There are certainly two or three things we’re looking at closely.”

In terms of fund launches Neptune’s style has tended to be soft launching funds with seed capital to bring a product to the broader market once it already has a proven track record over several years. Last September saw the soft launch of an emerging markets fund, which is top of its sector over the past eight months.

“We take the view that if we believe in something we should be prepared to incubate it to give it a track record before we start advertising it,” says Geffen. “At the end of this year we will have a three-year track record in our UK Special Situations fund and next year I suspect people will start looking at it.”

On the emerging markets launch he says the financial crisis has helped to highlight the progression of a fundamental economic shift from the West towards the East. At the centre of this will be the continuing growth story of China, where the government are targeting 8% growth in GDP this year. While there are still doubters who question whether this is achievable, consensus suggests China will see growth during a period where most of the rest of the world, and particularly developed economies, are suffering economic contractions.

Following the trauma of the past 18 months the rest of 2009 seems set to be a rebuilding process for much of the asset management industry. For those firms who managed to get through the crisis relatively unscathed, however, the coming year could prove full of opportunity.


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What do you think of a team-based approach? Email Tomas Hirst at tomas.hirst@centaur.co.uk to share your comments.


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