Neptune Global Smaller Companies fund

bowlhead99

Per the last annual accounts (which give a full portfolio listing), the objective is :

to generate capital growth by investing predominantly in a concentrated portfolio of up to 80 securities considered to be small and midcap equities, without regional restriction.

In that list of entities at year end they had 10.4% in Amazon, Facebook and Alphabet. You can still say they are 'predominantly' in companies that are considered to be small or midcap; and those 3 megacaps do acquire smaller businesses in tech and retail all the time, public and private.

As mentioned by others above they have changed name and strategy in recent years. But with only a £million in assets at year end (and 3 million at the 2015 and 2016 year ends) it's not something I would invest in.

Funds need critical mass to keep costs down and ensure longevity. For at least the last two years the manager has rebated / waived their fee so that the OCF doesn't go over their voluntary cap - because even £20k of normal costs such as audit fees, FCA fees, legal costs, distribution costs, depositary custody fees is approaching 2% on a £1.2 million fund.

At that point you have to say "what's in it for them?" other than the marketing cachet of being able to offer a suite of funds covering more market segments because of this one being under their brand. They are not directly making money out of it, certainly not in comparison to the costs of their investment team and systems etc. A lack of alignment of interests between investors and a fund's management is not a big positive in my book.

Looking at historic returns is a only one part of your due diligence when assessing funds for your portfolio. Much better to find something with more critical mass and likely longevity.

aroominyork

jamei305 wrote: »

It was called Neptune Global Special Situations until 2016.

I don't recall Amazon being a special situation up until 2016.

bowlhead99 wrote: »

At that point you have to say "what's in it for them?"

Good question, but since, as you say, it's not a fund to go near, a moot question.

bowlhead99

aroominyork wrote: »

Good question, but since, as you say, it's not a fund to go near, a moot question.

No, it's a pertinent question because it informs the decision that it's not a fund to go near.

The fact it can't make them money despite decent percentage gains (significant outperformance against MSCI index) means it may be shuttered, or keep on running as a zombie with an increasing cost percentage, neither of which are attractive. The only "in it for them" is the marketing exposure of having the fund in their range, and it's reasonable performance on the league tables. Not enough IMO.

aroominyork

bowlhead99 wrote: »

No, it's a pertinent question because it informs the decision that it's not a fund to go near.

Yes, understood.

So if someone invested £100k in this fund which increased its total AUM by c.10%, would the fund manager have to go out and buy another 10% of each of holding, or alternately buy some of the holdings and alter the weightings as a result of the new investor?

As a follow-on, for a larger OEIC with say £1bn AUM, does the manager have to make transactions each day? What happens when the sum of investors' purchases on any given day is £5m and the sum of sales £4.9m, or vice versa?

bowlhead99

aroominyork wrote: »

So if someone invested £100k in this fund which increased its total AUM by c.10%, would the fund manager have to go out and buy another 10% of each of holding, or alternately buy some of the holdings and alter the weightings as a result of the new investor?

Yes. Normally the former (increasing holdings keeping the mix broadly the same) because the addition of a new investor doesn't mean the strategy is wrong, nor that the companies you had assessed as fine the previous day were now not fine.

As a follow-on, for a larger OEIC with say £1bn AUM, does the manager have to make transactions each day?

Not every day. They will have a certain proportion in cash or liquid assets to fund withdrawals/ redemptions. And on the inflows side from new customer money, might let it build for a few days to an efficient order quantity rather than literally buying daily with new money.

If the underlying investments are property for example they are not going to buy or sell a warehouse or shopping centre or office block each day new money arrives or is withdrawn

What happens when the sum of investors' purchases on any given day is £5m and the sum of sales £4.9m, or vice versa?

They have a net new £100k to invest or disinvestment; same logic as above. They wouldn't invest the £5m and disinvest £4.9 on the same day due to the much higher transaction costs that would create (stamp duty and broker/custodian fees etc).

Of course it might just happen that on that day they'd decide to reduce their exposure to Amazon by £5m so after getting £5m in from new subscribers and paying out £4.9m to leavers they do still have £5.1m to deploy into a new company or the rest of the portfolio generally.

tg99

One of many Neptune funds that have struggled to attract anything more than a few £m of assets. Hence why they’ve closed - or changed the mandate of - a significant number of these strategies over recent years. Not surprising given the number of variants of regional / country equity strategies - e.g. ‘max alpha’, ‘ income’ - they launched.

aroominyork

bowlhead99 wrote: »

Not every day... And on the inflows side from new customer money, might let it build for a few days to an efficient order quantity rather than literally buying daily with new money.

If the value of the underlying equity assets goes up between the day I buy into the fund and when, possibly a few days later, the manager buys a new chunk of assets, do the existing fundholders lose out? This seems logical since I have increased the proportion of the fund held - temporarily - in cash, which reduces the proportion of each existing fundholder's investment which is held in equities.

bowlhead99

aroominyork wrote: »

If the value of the underlying equity assets goes up between the day I buy into the fund and when, possibly a few days later, the manager buys a new chunk of assets, do the existing fundholders lose out?

No they don't really lose out, because generally you paid a price per share that equated to the fair value per share of all the existing assets. So you are all in it together and you all have collective ownership of the whole pool of assets and you each have paid a fair price at the time of joining, to get involved in it.

This seems logical since I have increased the proportion of the fund held - temporarily - in cash, which reduces the proportion of each existing fundholder's investment which is held in equities.

Taking a one day snapshot of the fund when cash comes in and not spent, does imply a dilution of the gains and losses by comparison to what they would have been if those existing fundholders were the only people in the fund. But even if there were a few fewer people in the fund, the manager still needs to maintain a cash or liquidity pool to be able to deal with susbscriptions and redemptions.

So, it's not useful to look at cash at its lowest level after money just got spent, and think of that as the 'normal' postion, and then look at when cash has built up a little without being spent and think of that as a 'bad' position. Far more reasonable to take an average ongoing level of cash as being the 'normal' and recognise that sometimes there will be more cash than that and sometimes less cash than that.

The fact that some people join and leave from time to time means the absolute level and percentage level of cash will fluctuate a little bit from day to day as you all participate in this collective ownership of investments.

example:

There might be £1010 of value (£1000 investments and £10 cash) shared by everyone in the fund and the next day there might be £1016 of value (£1005 investments and £11 cash, due to £5 investment value growth and £1 dividend receipt). The ratio of investments to cash has changed.

Then on the third day another person comes along and says OK there are 254 people in this fund worth £1016 with equal shareholdings, they have £4 of value each. I will give you £4 of cash and then there will be 255 of us owning a pool of assets worth £1020. Fine, fair enough.

Then on the fourth day the value of the fund goes up from £1020 to £1040 due to investment growth ; there's now £1025 of investments and £15 cash.


- If you were spoiling for an argument with the fund manager you could say on the fourth day looking back at it:

"Hey, the return of the fund going from day three (1020 total value to 1040 total value) is nice but it's been driven by the share price growth of 1.99% on the £1005 of investments portfolio...

...If you had instantly invested the incoming £4 from that new investor the day it arrived, each of us 255 investors would have got 1.99% share price growth on £1009 of investments instead, and my personal share of the growth would have been 1/255 x 1.99% x £1009 which is a bigger number than what I got which as instead of 1/255 x 1.99% £1005. And if you had not let the new person in at all, my personal share of the growth would have been 1/254 x 1.99% x £1005 which again is bigger than what I got which is 1/255 x 1.99% £1005 ...

...Either way, I seem to have lost out due to you letting this other person in and not immediately going out and spending his £4 the same split second that the cash came into the fund's coffers"


The manager will tell you that it is inefficient and impractical to spend the £4 coming in in real time; the splitting of £4 over 80 stocks does not give you very much to acquire in each stock, especially in the smaller components of the portfolio. And he will remind you that the idea of a collective investment scheme is that you all collectively benefit from pooling your resources and getting access to a diversified pool of assets sharing the profits among all of you, more efficiently than buying the same holdings individually outside the scheme, and you are benefiting from that just like the new joiner is benefiting from it.

If the returns are diluted from what they potentially could have been due to a new joiner coming in and changing the cash ratio a little bit, that's just how it works. Just like how a loss that day would have been diluted due to him coming in too. But the very fact the new joiner's cash exists means there is now a bigger total pool of assets with which to run an efficient portfolio, potentially at a lower cost per head.

If you don't want to deal with a scheme that has a potential 'cash drag' effect on returns due to the manager having to deal with subscriptions and redemptions then you could use a 'closed ended' scheme traded on the stock exchange instead, like an investment trust. But then you may have to pay more than the underlying value of the assets to buy into it (due to market supply and demand for the product) and if you wanted to leave you couldn't just cash in your chips with the manager, you'd need to sell on the open market and might receive less than the value of the underlying assets. So pros and cons with different collective investment structures and you can choose what you prefer.

Or of course if you don't like collective investment structures at all because you don't want the activities of others to influence your pure returns whatsoever, you are welcome to eff off and go solo, building your own portfolio of 80 diversified shareholdings in suitable proportions with your relatively small pot of cash, and then you don't have to worry about being accommodative to your fellow man.

aroominyork

Beautifully explain, bowlhead - thanks.

grey_gym_sock

bowlhead99 wrote: »

of course if you don't like collective investment structures at all because you don't want the activities of others to influence your pure returns whatsoever

... then you shouldn't invest in the stock market at all, but should go and start your own business. you should also make sure your business doesn't sell to others, or employ others, or use infrastructure built by others. you should also make sure forget anything you learnt in school or from your parents, and make sure to catch any diseases you previously avoided thanks to medical care provided by others. and so on

more seriously ... with real funds we're not talking about a few quid uninvested in a fund worth a few thousand quid. it's more like a few thousand quid uninvested in a fund worth a few million (or a lot more). and while the manager may not practically be able to invest a few thousand quid across all the shares the fund is invested in, they can practically invest it in an ETF or futures, tracking an index broadly similar to what the fund usually invests in. so "cash drag" is easily enough avoided if they want to. this only breaks down if what they usually invest in isn't quoted at all (e.g. unlisted companies, or direct real estate); in which case, IMHO perhaps they shouldn't be using an open-ended fund structure in the first place.