Neptune Income Fund research update

Richard Troue | Mon 09 March 2015

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During 2014 a record £97.4 billion was paid in dividends by UK companies. As well as being driven by profitability and cash flow, the strength of the US dollar also played a part, particularly towards the end of the year. This is because some large UK companies report their accounts and pay dividends in US dollars (generally because they transact most of their business in US dollars or currencies linked to it).

A strong US dollar therefore makes their profits and dividends more valuable when converted to sterling. HSBC, Shell and BP - the three largest dividend payers in the UK - all report in dollars. This added approximately £310 million to the total dividends paid by UK-listed businesses last year.

Robin Geffen, manager of the Neptune Income Fund, believes the US dollar will remain strong relative to sterling this year. While UK economic growth has moderated, the US is going from strength to strength and he believes the Federal Reserve can increase interest rates this year without jeopardising this growth or destabilising the housing market. The UK on the other hand has an over-priced housing market and an uncertain general election to contend with in May. He believes these factors are likely to depress the value of sterling relative to the US dollar and he has positioned the fund to take advantage of this.

Robin Geffen is positive on Pearson, for example, the global publisher which he suggests is successfully transitioning from print to digital publishing. It has a large US education business and generates 60% of revenue there. Even a modest move in exchange rates has the potential to improve earnings and he sees the potential for the dividend to grow.

Similarly, he has invested in HSBC, one of the UK-listed companies which reports in dollars. During the year, as HSBC converts earnings to dollars, the value of these dollars will appreciate if the US currency strengthens. This could mean higher earnings and, importantly, dividends when they are ultimately converted back to sterling. Robin Geffen believes this will prove one of the most significant drivers of dividend growth in 2015, a year in which economic and political uncertainty could provide challenges for the UK equity market.

Finally, he is investing directly in US companies, taking advantage of his flexibility to invest up to 20% of the fund in companies listed overseas. Microsoft is held to capture its dollar earnings. While the firm is adjusting to weaker markets for PCs, it is innovating fast and becoming a leader in cloud computing technology. He suggests investors have underestimated its transformation, while the company also adds diversity to a UK income portfolio.

Our view on this fund

Robin Geffen is not afraid to back his ideas with conviction. He runs a concentrated portfolio of 34 stocks which allows each to have a significant impact on performance, but is a higher risk approach.

Should the US dollar continue to strengthen against sterling in 2015 some of the underlying companies in the fund could receive a boost and the fund's dividends could be worth more when converted to sterling. Of course if sterling is strong relative to the dollar the reverse would be true.

We removed this fund from the Wealth 150 in August 2013 after our analysis suggested deterioration in the manager's stock picking contributed to a period of lacklustre performance. Performance has picked up recently and over the past year the fund has grown by 13.0% compared with 7.7%* for the average fund in the IA UK Equity Income sector. We would like to see performance improve for a sustained period before reconsidering the fund for the Wealth 150.

Past performance is not a guide to the future. Source: Lipper IM *to 02/03/2015

Please note the fund's charges can be taken from capital, which can increase the yield but reduce the potential for capital growth.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.