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Back Neptune for a value bet on European recovery

This fund's value positioning may pay off in the fragile eurozone recovery.
June 25, 2015

For a high-risk bet on a European recovery, Neptune European Opportunities (GB00B8LF7310) could be the underdog about to have its day.

IC TIP: Buy at 136pp
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Recent outperformance
  • High conviction manager
  • Stock selection buoyed by eurozone recovery
  • High active share
Bear points
  • Medium-term underperformance
  • High risk positioning
  • High portfolio concentration

Neptune European Opportunities has underperformed its peers and benchmark in recent years but brokers say that if its value positioning pays off, it could be a good fund to back. Manager Rob Burnett takes a very different view to his peers - the fund has an active share (the portion that is different from its benchmark index) of over 80 per cent - and has been backing Italian banks as a domestic play on the European bounce-back. Analysts say his high-risk strategy could now be coming to fruition.

IC TIP RATING
Tip styleSpeculative
Risk ratingHigh 
Timescale Long term 

The European revival is fragile. Since the beginning of the year equities have been on the rise, fuelled by the quantitative easing (QE) programme. But with Greece hovering on the brink of bailout or exit, and rate rises on the horizon, the potential for shocks remain making it a key area in which good managers can find value.

 

 

Stockbroker Brewin Dolphin has a strong conviction in Neptune's value-style, high-risk approach, which it says will benefit from a concentration in value-orientated rather than bond-like stocks in the coming months. After several years of lagging behind the MSCI Europe ex UK index, the fund has started to outperform in 2015 suggesting a turnaround is on the horizon.

At the start of the month, Anna Haugaard, a fund analyst at Brewin Dolphin, said: "While other investors were piling into the European sovereign bond trade, Mr Burnett was warning that the QE tailwind was over. Italian banks are a very large portion of the portfolio which he sees as a hedge against rising rates and also benefiting from structural change that could lead to a wave of mergers and acquisitions activity.

"So far this year, Mr Burnett's positioning has worked very well and he is one of the strongest performing European managers in 2015."

For the past three years the fund's performance has been weak compared with its sector, returning 49.9 per cent against an IA Europe ex UK sector average of 60.4 per cent over three years, according to Trustnet. But in the year to date it has already climbed up to be the sixth best-performing fund out of 104 in the sector, with a total return of 13.7 per cent, beating the average 8.7 per cent. It has also outperformed the index over six, three and one months, delivering higher total returns than the benchmark and sector.

This week, Ben Gutteridge, head of fund research at Brewin Dolphin, said: "This fund has been pragmatically managed over time but is exhibiting a clear value bias; shying away from the healthcare and consumer staples sector and instead embracing the opportunity in financials, particularly Italian banks.

"The fund was positioned in this manner in 2014, which in retrospect was too early. Having revisited the investment case our conviction remains high, however, and has been highly rewarding in the year to date."

Mr Burnett's strategy is to form macro views on asset classes, sectors and stocks and then back those judgements strongly leading to chunky sector and stock bets, and a very high level of risk. The fund is currently 35 per cent invested in financials - the MSCI Europe ex UK index has only 22 per cent - and 19.5 per cent in consumer discretionary stocks.

Most of Neptune European Opportunities is invested in stocks that derive a large amount of revenue from Europe, making it a strong bet on a recovery there. Its largest holding, French car manufacturer Peugeot (FR:UG), at 4.3 per cent, derives more than two-thirds of revenue from western Europe.

Hargreaves Lansdown removed the fund from its list of top funds in January due to weak performance in the short term. The investment platform said: "At present, Rob Burnett retains his conviction in a eurozone recovery, especially across the periphery. If his views play out, the fund could perform well. On the other hand, if he is wrong, and the recovery weakens and deflation persists, the fund is likely to struggle."

So if you are backing a European recovery and want to take a risk on a manager with strong convictions, buy.

NEPTUNE EUROPEAN OPPORTUNITIES C ACC (GB00B8LF7310)

PRICE:136p3-YR MEAN RETURN*:16.10%
IA SECTOR:Europe Excluding UK 3-YR SHARPE RATIO*:1
FUND TYPE: Oeic3-YR STANDARD DEVIATION*:14.50%
FUND SIZE:£525.09mONGOING CHARGE:0.85%
No. OF HOLDINGS:46YIELD:1.70%
SET-UP DATE:3 October 2012MINIMUM INVESTMENT:£100

Source: Morningstar, as at 23 June 2015

*Results are for older A Acc share class due to longer performance record. Newer C Acc share class referred to in text.

 

Performance in cumulative total return (%) relative to sector and benchmark

 1m3m6m1yr3yr5yr10yr
Neptune European Opportunities*-1.50.412.5-3.750.035.0151.6
Index : MSCI Europe ex UK TR -1.5-1.88.24.761.448.6102.5
UT Europe Excluding UK -3.2-2.57.35.162.457.7112.1

Source: Trustnet

*Returns are for older A Acc share class due to longer performance record. Newer C Acc share class referred to in text.

 

Top 10 holdings

Holding% of assets
Peugeot4.3
France Telecom4.0
Banca Popolare dell'Emilia Romagna3.7
KPN3.6
Banca Popolare Di Milano3.5
Slazgitter AG3.3
Banco Popolare3.3
Credito Valtellinese3.2
SABMiller3.1
WACKER3.1

Source: Neptune.com, as at 30 April 2015

 

Geographic breakdown

Country% of assets
Italy24.7
France23.9
Germany12.5
Netherlands 9.7
Spain9.1
Switzerland6.5
Finland3.2
UK3.1
Other Europe3.1
Other2.3
Norway1.9

Source: Neptune.com, as at 30 April 2015