Investors who have relied on small and mid-sized company shares to boost their portfolio returns over the past seven years have enjoyed a "free lunch" according to Neptune founder Robin Geffen – but the meal is very much over.
Since 2009, 116 of the 121 small and mid-cap funds have outperformed the FTSE 100. Broader UK equity income fund managers chased these profits – allocating ever increasing amounts of their portfolios into small and mid-caps over the past five years, now at 40%. As the market has risen, investors have profited, but Geffen warns that this indiscriminate allocation will no longer work. Instead only those fund managers with exceptional stock-picking abilities will prosper.
"I want to let off a firework to warn investors," Geffen said yesterday, speaking at a conference in London. "There is a changing of the guard. The assets that have worked for your portfolios over the last few years will no longer deliver. We are living in extraordinary times."
And the tide has already begun to turn; only seven funds in the UK equity income sector have outperformed the FTSE 100 year to date, as the large cap index rallied on the back of overseas earnings.
This sea-change is largely due to the geo-political backdrop. A new Prime Minister in the UK and a new President in the US “confounded critics”, said Geffen and have had a considerable effect on markets. He warned that upcoming elections and referendum in Europe would likely do the same and the triggering of Article 50 next year would add to the unrest.
“Only one country has left the European Union before and that was Iceland,” Geffen explained. “They had one treaty with the EU and it took seven years to renegotiate. Britain has 43 treaties. We should prepare for higher inflation, higher interest rates and weak sterling.”
Bond Proxies are in Trouble
On interest rates, Geffen warned that too many investors – professional and private alike – were building their forward expectations based on the events of the past five years.
"Complacency is now built into the market, the expectation is that interest rates will remain low forever, but this will not persist," he said.
While Geffen admitted that valuations for many equity markets were high, he said that equities were still attractive over the long term but that investors must be discriminating. Tipping Neptune’s own UK Mid-Cap Fund, run by Mark Martin, which has a five year annualised return of 17%.
Geffen said that within his own Neptune Income Fund – one of the few that has outperformed the FTSE 100 year to date – he was avoiding bond proxies, which would suffer as inflation kicks in and interest rates start to rise.
Instead, he favours large companies with overseas earnings which can benefit from weak sterling. The fund can invest up to 20% in overseas stocks, and Geffen has a fifth of the portfolio to US equities, which he believes will benefit from Trump’s corporate tax plans.
“Last time there was a repatriation of overseas earnings in the US, under Ronald Regan, we saw an increase in stock buybacks and dividends,” he said.
Within this US allocation, Geffen has a bias towards technology stocks including Microsoft (MSFT) and Apple (AAPL).
