This is closing in on three times the 33.91 per cent made by the sector and is highly impressive for a UK fund in a struggling economy. This success has seen the fund, which has five FE Crowns, attract significant inflows; over the past year it has grown from just over £3m to just under £70m, according to FE Analytics.
With this in mind, it seems appropriate to ask why it has done so well.
The fund’s strong performance is not simply the result of effective stockpicking – Martin (pictured) has a specific approach and process that has served him well over the past three years.
The philosophy behind FE Research is that all styles and approaches are likely to have periods when they do better than others, so to build a diversified, low-volatility portfolio it is necessary to select funds with complementary styles.
The first thing to note is that the fund is investing in an area of the market that is booming: over the past three years the FTSE 250 index has made 53.75 per cent while the FTSE 100 has made just 29.01 per cent.
Performance of sectors over 3yrs
Source: FE Analytics
It is no surprise that a list of the top performers in the sector is made up of funds that invest in that area of the market.
Mid caps are known to be more volatile: our data shows that in years when the UK market has finished down, the FTSE 250 has fallen further.
One of the strong selling points of Martin’s fund is that it minimises this volatility. The worst year for the FTSE 250 in the life of the fund was 2011, when the index lost 10.06 per cent. Neptune Mid Cap made 3.65 per cent.
One of the reasons for this is the manager’s strong adherence to a value philosophy, in that he will only buy stocks that he thinks are undervalued by the market.
This protects funds in down markets, as our data shows. In both 2008 and 2011, the most recent years when markets fell, the MSCI UK Value index outperformed both the FTSE 250 and the FTSE 100.
Performance of indices in 2008 and 2011
| Name | 2011 returns (%) |
2008 returns (%) |
|---|---|---|
| MSCI UK Value | 5.2 | -28.14 |
| FTSE 100 | -2.18 | -28.33 |
| MSCI UK Growth | -6.86 | -29.3 |
| FTSE 250 Index | -10.06 | -38.15 |
Source: FE Analytics
Value stocks do not always outperform, however, and our data shows that Neptune’s place at the top of the tables is to a large extent dependent on how well it has done in a recent up period for the value style.
Between March 2010 and September 2011, UK growth stocks outperformed value stocks, and Neptune Mid Cap slipped down the tables.
Performance of indices March 2010 to Sep 2011
Source: FE Analytics
Its returns were still good – its 20 per cent put it in the top quartile – but it was the 20th-best fund in the sector rather than the first.
There is reason to believe that the fund will not top the performance tables should the market go through a sustained period where growth stocks outperform, therefore.
Neptune UK Mid Cap has proved so popular in part because it has managed to do well in different markets. It outperformed the FTSE 250 in 2011 – a down market – and 2012 – a rising one.
However, it significantly underperformed its benchmark in 2009, when the market rebounded strongly after the financial crisis to post gains of 50.64 per cent. The fund made 40.06 per cent.
According to the manager, this is because he avoids cyclically exposed stocks and those likely to do well in an inflationary, QE-driven market.
We may be seeing the same pattern repeat itself in 2013. So far the fund has underperformed the FTSE 250, and even the FTSE 100.
On this reading, the fund may not be best placed to take advantage of the current rally.
With quantitative easing looking likely to be a key policy tool of the Government, and many commentators warning of eventual inflation, this may be another reason to diversify exposure from the fund’s strategy.
For anyone looking for a fund to offset these risks, Amandine Thierree, analyst on the FE Research team, highlights Julie Dean’s Cazenove UK Opportunities portfolio, which has a contrasting style to Martin’s.
"She tries to follow the business cycle so will look to benefit from market rallies as well as defend," Thierree said.
The five crown-rated Cazenove UK Opportunities fund has outperformed the Neptune fund year-to-date, suggesting that Dean’s approach is paying off.
Although it did not do as well as Neptune UK Mid Cap in 2010, it has more of a multi-cap approach, meaning that over a sustained rally it may underperform the Neptune portfolio.
Cazenove UK Growth & Income is another fund with a business cycle approach. It also has a high weighting to the more cyclical financial sector, which Martin largely avoids.
Unicorn Outstanding British Companies is another fund with a very different style. Data from Style Research shows that John McClure’s five crown-rated portfolio has a high exposure to mid and small cap growth companies, and a low weighting to companies that score highly on value ratios.
The fund’s returns are fourth in the sector over three years, at 76.98 per cent, and eighth over five years, at 102.2 per cent.
Data from FE Analytics shows that a portfolio split 50/50 between the Unicorn and Neptune funds would have made 84.5 per cent over the past three years, with a volatility of 13.64 per cent – lower than the volatility of Neptune UK Mid Cap and Unicorn Outstanding British Companies.
Performance of composite vs funds over 3yrs
Source: FE Analytics
The Neptune fund underperformed the Unicorn fund in the earlier part of that period – when the growth index was superior – and outperformed during the latter part.
Rob Gleeson, head of research at FE, explains that this is a very simple application of principles that the team uses in creating model portfolios.
He says that seeking complementary funds is not about lacking trust in a manager, but about a belief that it creates portfolios with a better risk/return ratio.
"By carefully selecting the right mix of active funds, we are able to diversify away more risk than the asset allocation model alone would be able to, leaving us a little bit extra in our risk budget to spend on more exciting investments that drive returns while still sticking rigidly to the desired risk profile," he said.