Market conditions remained challenging in April, with stock and sector fundamentals once again taking a backseat to sentiment and momentum. Although the UK market delivered a positive return over the month, its progress was uneven with the rally being led by the sustained strength of the mining and oil & gas sectors.
We have previously articulated in these roundups, our strong view that the recent rally in commodity prices and indeed in the share prices of commodity-related companies does not appear to have been justified by fundamentals. We are increasingly convinced that this rally is unsustainable and will be short-lived, not least because of the dangerous and potentially harmful speculative behaviour in China’s commodity futures markets.
Nevertheless, while it persists it represents a challenging backdrop for the fund given its avoidance of the shares that have benefited from this rally and our preference for the more fundamentally-attractive, dependable growth companies that have been sold down during this commodity-inspired rally. Consequently, the fund underperformed the market during April, delivering a marginally negative total return.
Like the commodity-price recovery with which it has been coincident, the fund’s underperformance hasn’t been driven by fundamentals. Therefore, we do not expect it to persist for long. We remain confident that the fund will deliver attractive returns to investors in the long run. Although it may sound perverse, if share prices fall without fundamental justification, they become even more attractive to us. As a result, it is fair to say that we are more confident in the long-term returns that the fund can deliver now than we were a month ago.
The largest individual performance detractor was Allied Minds, despite incrementally positive news flow during the month. The company’s share price remains well below its fundamental value and we continue to believe that the business has the potential to deliver very attractive returns for its shareholders in the future. Allied Minds forms, funds and develops a wide range of innovative companies that aim to address large and unmet consumer and commercial needs. The company released its full-year results during the month and these showed clear progress towards commercialisation in several of its underlying businesses. We were also encouraged by management’s commitment to crystallising value for shareholders in 2016, which should help the market to understand and value this business more appropriately.
Tobacco stocks Imperial Brands and Reynolds American were the victims of an uncharacteristic sell-off, having been immune to the declines that other dependable parts of the market have endured thus far this year. Both companies fell slightly on no news but remain very attractive to us due to their exceptional ability to generate and distribute cash to their shareholders.
More positively, Purplebricks delivered a strong return as the market continued to warm to the company’s long-term growth prospects. In aggregate, our healthcare holdings also delivered a positive contribution, with GlaxoSmithKline, AbbVie and Alkermes in particular, delivering a solid contribution.
GlaxoSmithKline had a surprisingly strong first quarter in 2016 and its results were well received by the market. Although the company’s recent share price performance has been encouraging, we continue to believe that the current valuation significantly understates the sum of Glaxo’s constituent parts.
AbbVie also benefited from a very strong first quarter, with growing revenues driven by an increase in sales of its main product, Humira. For some time now, the market has worried about the sustainability of the Humira franchise and challenges to its Humira patent portfolio. The AbbVie management team, however, has consistently argued that its intellectual property is robust, giving it several years of patent protection under which to continue to grow Humira, which is already the biggest selling drug in the world. Our own analysis gives us confidence in the management team’s view and, consequently, the share price continues to be far behind our view of the company’s intrinsic value. Alkermes meanwhile, continued to recover from its disappointing trial results in January where the initial share price reaction looked far too severe.
In terms of portfolio activity, during the month we invested in Equiniti, a business with impressive prospects, via a share placing. Amongst other things, the company provides share registration and associated investor services, such as the administration of the NHS Pension Scheme.
Also, we bought a position in ABLS Capital, an unquoted company which will fund early-stage drug discovery. The business is essentially a joint venture between Allied Minds and Bristol-Myers Squibb, the US pharma company. The company’s unique funding model gives us an attractive risk-reward profile and a clear route to long-term value realisation across a range of different early-stage projects.
Elsewhere we added to several positions at attractive valuations, including Hostelworld, Vernalis, CityFibre and Capita. In terms of disposals, activity was limited. We slightly trimmed our position in Roche but we remain attracted to the long-term fundamentals of the business.
In terms of outlook, if the old investment adage is anything to go by, investors may be entering this month with one eye on the exit, particularly given the volatile start to the year that we have endured. However, to “sell in May and go away” would not be a prudent move, in our view. The equity asset class is, by its nature, one that requires a long-term view. It’s ‘time in’ the market that counts, not ‘timing’ the market. Investment decisions should be based on a perspective of years rather than months. On this basis, although the stock market faces its challenges, it still offers a yield attraction when compared to most other asset classes. Within the equity market, pockets of undervaluation remain. We have positioned the portfolio towards these undervalued areas and remain very confident about the prospect of delivering attractively positive long-term returns from these investments.
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The views expressed in this article are those of the author at the date of publication and not necessarily those of Woodford Investment Management LLP. The contents of this article are not intended as investment advice and will not be updated after publication.
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- The value of investments and any income from them may go down as well as up, so you may get back less than you invested
- Past performance cannot be relied upon as a guide to future performance
- The annual management charge applicable to the fund is charged to capital, so the income of the fund may be higher but capital growth may be restricted or capital may be eroded