Neptune trawls fresh water for bigger catch

Robin Geffen, chief investment officer of Neptune Global Income fund, is questioned by Adam Lewis.

Q: Why have you decided to launch a global income fund?

A: The Investment Management Association’s UK Equity Income sector has been the most popular sector among investors for the past five years, taking the lion’s share of all Isa money. This new fund will broaden investors’ exposure away from British companies to those in the US, Europe, Japan, Asia and the emerging markets.

Q: Are yields higher overseas than they are in the UK?

A: At present the UK stockmarket yields just over 2%, whereas the fund has an initial target yield of 3.5-4%. We will ensure this target yield remains above the yield of the average UK Equity Income fund. The prospects for capital growth are greater overseas and investors are diversifying their portfolio away from being dependent on just one market.

Q: What experience does Neptune have of running a global income mandate?

A: To run a fund like this you have to prove you can manage global equities and income money – and I do both. I have run Neptune Global Equity for more than four years and the Neptune Income fund since December 2002.

In the UK Equity Income universe, only six funds out of a peer group of 91 have been top-quartile in each of the past three calendar years, and our Income fund is one of them. So we have the credentials to run a global equity income fund. The fund will also draw on the ideas of our American, European and Japan funds, which were all top-quartile in 2005.

Q: Who will manage the fund?

A: The fund is being run by a team of four, of which I am the lead co-ordinator. Chris Taylor, head of research and Japan manager, Rob Burnett, manager of the European fund, and US Opportunities manager Felix Wintle, will all pool their ideas. As we will be using the skills we exercise on the other funds we manage, this portfolio will be no extra call on my time.

Q: What sector will the fund be in?

A: As the IMA will not yet introduce a new overseas equity income sector, it will be placed into the specialist peer group as it cannot go in Global Growth. However, for performance reasons we will benchmark our performance against the UK Equity Income sector, as we have to demonstrate to people that they will do at least as well or better by being in this fund. In the long run, we hope the IMA will introduce a new sector.

Q: Why is the fund not launching this week as planned?

A: Timings were always going to be tight as we had an ambitious launch date in mind. We really wanted to get this fund up and running as soon as possible, so that as soon as FSA approval came through, we could launch it. Practically this became difficult as FSA approval was not due until the end of March; we were therefore unable to provide the necessary fund data to the platforms in time for the launch date, nor would we be able to offer investors a meaningful offer period. This new timetable allows investors to access the fund directly at a fixed price for three weeks from April 10 and gives us more time to liaise with the platforms.

Q: How will the portfolio be constructed?

A: The fund will be run in the same way I manage the Global Equity fund, only it will be buying income instead of growth stocks. As such, it will use the top-down global sector weighting matrix employed on my Global Equity fund and then follow the income strategy I use on my Income fund to select stocks.

Q: How many stocks will the fund hold?

A: It will contain 50 equally weighted stocks, with each position representing 2% of the portfolio’s assets. We have identified what these stocks will be but we are not running a dummy portfolio. The stocks selected in the portfolio will not be dependent on any one investment style, so it should perform well in most market conditions.

The fund is aiming for a return in excess of 110% of that made by the FTSE All-Share index and the portfolio yield should be in line or better than that of the Income fund.

To include a stock in the fund, we have to see at least a 20% upside on its capital value. It is not just about buying companies at any yield.

Q: As with other Neptune funds you manage, have you identified a limit at which you will soft-close this fund?

A: Like the Income fund I run, which we will soft-close at 500m, there will be a point at which we would have to soft-close this fund. But at 50 stocks at 2% each, it is scalable up to 1bn of assets under management.

Q: How high will turnover be?

A: It will not be too aggressive. We build valuation models on all the stocks we invest in on an 18-month to three-year horizon. Each stock has been set target prices that we think they are worth, and once they reach them they will be sold.

Q: How will you manage risk?

A: As well as being diversified at a stock level, it will be diversified by sector. This is because it will always be invested in at least seven out of the 10 MSCI global sectors.

Q: When will the fund pay out dividends to investors?

A: It will pay dividends twice yearly, at the end of September and at the end of March. Indeed, we have structured the fund so that it pays dividends on alternate dates to the Income fund, which pays out at the end of June and the end of December. This means if investors hold both funds, they will receive a cheque from us every quarter.

Q: Have you decided a geographical breakdown for the fund yet?

A: Not yet, as it still requires FSA approval. There are great opportunities in both the mature and emerging markets, and we do anticipate starting with an overweight stance in the emerging market region on the back of decent valuations and yields.

We see a long-term growth trend in Brazil and a strong Russian economy, so we are identifying stocks in those areas. We are also looking to China owing to the demographic shift taking place and the huge infrastructure spend for the Olympics in 2008.

Q: Any stock examples?

A: Companies we are looking at include Brasil Telecom and the Australian brewery Fosters. Fosters is on a yield of 5% and a P/E of 7x. It is growing at an encouraging rate and has further to recover.

Q: What size companies will you be investing in?

A: We are not going for smaller companies. The fund will not be invested in any company that has less than a $1bn [570m] market capitalisation.

Q: Will you invest in the fund yourself?

A: Yes, I will be supporting the fund with my own money.

Robin Geffen is chief investment officer and managing director of Neptune Investment Management. Geffen, formerly CIO of Orbitex Investments, launched Neptune in May 2002 after Orbitex pulled out of the British market. He manages four funds for Neptune: Balanced, Managed, Global Equity, Income, and the Russia & Greater Russia fund. The Global Income fund, which begins trading on May 2, will be the fifth fund under his name. Geffen graduated from Oxford University in 1979 and began his investment career at Charterhouse J Rothschild.