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Long-distance cyclist

When I advocated Asia and emerging markets for investment in a self-invested personal pension a few years ago, I was castigated by a number of advisers who believed they were far too dangerous for a pension. Retail clients are now besotted with these regions and this has been given further impetus by the dramatic recovery they have made from the August fallout, with China in particular exploding into life.

One of the least popular areas with retail investors has been Europe. Indeed, it feels as if Europe, with its pedestrian GDP growth and leftist politicians, has been written off entirely despite the fact that the funds have performed very well in recent years.

One fund that has certainly made hay in this area is Neptune European opportunities.

The fund has been run by Rob Burnett since he took over from Barry Norris in May 2005. I admit that I initially had doubts about whether Burnett could carry on the fine performance of his predecessor but he has answered his critics in the best possible way and performance has been stunningly good during his stewardship. Only recently has performance slipped but this is something I wish to discuss later.

Neptune’s process is broadly the same across all its funds. It is based on global sector views, with the aim of identifying the growth phase of each sector. It then gives each sector a weighting based on its likelihood to outperform and stocks are selected accordingly.

All members of the team, including the fund managers, are also given the role of sector analyst. Each one prepares a report that focuses on the broad macro picture and growth prospects for the sector.

It is then the responsibility of the individual manager to do their own stock-specific work.

Burnett’s area of expertise is financials, clearly an important area at the moment.

Neptune believes that there will be a change of sector leadership in Europe. Burnett’s fund has done extremely well from the pro-cyclical movement that we have seen over the last three or four years. The cycle has gone on far longer than many people predicted and Neptune has taken full advantage of this.

However, exposure to this area has been a strong negative influence on performance in recent months.

The strong headwinds against cyclicals include a strong euro, a weak dollar and softening global growth.

Neptune has an increasing conviction that this area is becoming more vulnerable and that investors are now paying close to parity for cyclicals against defensives. The European opportunities fund is therefore moving out of this area.

A key area where it has gone underweight is in financials. Burnett is wary of getting snared in a value trap and does not believe the market has priced in the negatives correctly. His view is that the uncertainty and unpleasant surprises will continue for some time.

It is stating the obvious to say that loan growth will slow as a result of the credit crisis. This will hit OECD banks far harder than emerging market ones, since loan growth potential is still huge in that region. Neptune European opportunities has been repositioned to the point where financials now account for just 6.9 per cent of the fund. This money has been redistributed to areas likely to show some resilience such as consumer staples (almost 17 per cent), healthcare (15 per cent) and utilities (10 per cent).

Neptune’s shift in view might provoke feelings of doom and gloom for some but I think it should be taken as a sign of new opportunities.

If it is right, the fund should once again be back at the top of the performance tables. The conclusion that I take from all this is that as one door closes, another one opens.


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