Neptune’s Geffen warns of mid-cap bloodbath

UK investors focusing on mid-cap stocks in the second half of 2010 could find themselves trapped by a dearth of liquidity as the market suffers a ‘long slow bleed’, according to Neptune Investment Management’s Robin Geffen.

Geffen, who leads the investment team at Neptune, has been buying high-quality yield stocks in developed markets across the group’s funds in order to take a firmly defensive posture if markets suffer another retreat. The group’s Neptune US Opportunities fund, managed by Felix Wintle, has even gone as far as hedging 20% of its fund against further market falls with an S&P 500 future.

In his £900 million Neptune Income fund, a recommended investment on Citywire Selection, Geffen is now very defensively positioned and he warns that many fund managers who have benefited from the outperformance of 'mid-cap' companies in the FTSE 250 this year should know when to drop those winners.

He said: ‘I would feel incredibly uncomfortable to be in UK deep cyclical stocks now. The FTSE 250 has outperformed the FTSE 100 and is yielding about 6% but to my way of thinking, that is a function of liquidity.

'If we go on a long slow bleed and there is no liquidity in those FTSE 250 stocks [some fund managers] will find they will not be able to get out. That is the area that could turn into a horror show in the UK with no liquidity and no buyers and nobody will be able to get out because the door has already been closed in their faces.’

Geffen said global equity markets are essentially justifying caution in the developed markets and optimism in emerging markets. He believes the second half of 2010 will see markets experience the sort of rapid risk-off/risk-on trades that have dominated the first half of the year.

‘Even within developed markets there are going to be sharply good and sharply bad days, and overall the direction is going to be hard to call,’ he said.

‘You get one day when we have some good jobs data and the FTSE 100 falls to 4,800, then another day where you get bad data and everyone thinks the world is going to end. This market is capable of dropping or rising 10 to 155 points, not just here but in the US and Europe as well.’