After all the turmoil of June and July, August was a rather quiet month for global equity markets during which the fund delivered a modest positive return.
Provident Financial was the largest contributor to performance. Its shares had sold off drastically after the EU referendum, reaching an eighteen month low in late June. We were convinced that its attractions were undiminished by the prospect of Brexit and added to the position during the sell-off. Since then, its share price has mounted a steady recovery as the market has started to undertake a more rational assessment of its prospects. Provident Financial provides a wide range of financial services to the UK’s non-standard lending market, including consumer credit in the form of small, unsecured loans and sub-prime credit cards and motor finance. Recently, we met with Chief Executive Officer, Peter Crook and his management team which confirmed the excellent fundamental progress that the company is making across all lines of business. For example, it is expanding its product distribution channels, especially focusing on developing its digital footprint to capture and retain more customers. Also, Moneybarn, its sub-prime motor finance business, is developing very well, supplementing profit progression. Overall, these developments demonstrate that the business is on track for yet another year of strong growth which further strengthens our conviction in the company’s long-term prospects.
In a similar vein to Provident Financial, several other stocks also continued to stage a post-referendum recovery, including Capita, Babcock and Legal & General.
There was also a major contribution from G4S, with good half-year results beating low expectations. The market had been concerned that the security company might need to raise more equity to bolster its balance sheet, but the strength of its results has alleviated that pressure somewhat. Although it has had several problems in the UK in recent years, G4S is a global-facing business with strong long-term growth prospects in emerging markets in particular. The company has a robust and geographically diversified pipeline, strong cash flows and good demand for its services globally. In our view, the market continues to undervalue these growth prospects.
Theravance Biopharma was another positive contributor to performance. During the month, it reported its half-year results and took the opportunity to update investors on the excellent development progress within its pipeline. In particular, Theravance’s partnership with GlaxoSmithKline and Innoviva to develop a treatment for chronic obstructive pulmonary disease (COPD) has yielded very promising top line results from its pivotal Phase 3 study. The company is also seeing very encouraging clinical data results in its Phase 1 studies from its JAK inhibitor, a potential treatment for severe inflammatory bowel diseases such as ulcerative colitis and on its leading NEP inhibitor program, TD-0714, a potentially best-in-class treatment for cardiovascular conditions.
Elsewhere in the health care industry, several of our holdings weakened modestly during a month in which Hillary Clinton reaffirmed her intention, if elected as the next President of the United States, to tackle unfair drug pricing practices. This time, the controversy was centred on speciality pharmaceutical company Mylan, which distributes the EpiPen auto-injector, a treatment for life threatening allergic reactions. Since it acquired the rights in 2007, Mylan has increased EpiPen’s price by almost 500%, making it unaffordable to a lot of patients. As we have noted before, we do not believe that Clinton’s rhetoric undermines our investment case for investing in genuinely innovative companies within the sector and, although we do have some sympathy with her concerns about instances of egregious pricing behaviour within the industry, they are not widespread. Nevertheless, market sentiment turned modestly negative during the month, resulting in share price declines for the likes of AstraZeneca, GlaxoSmithKline and Alkermes.
In terms of portfolio activity, we added a new unquoted position in the form of Cambridge Innovation Capital, a long-term patient investor in technology businesses created from research at the University of Cambridge and the broader ‘Cambridge Cluster’.
Elsewhere, we participated in a placing of shares in Equiniti, which allowed us to almost double the position in this attractively valued administration and technology services company. We also slightly increased our positions in a range of other holdings, including Babcock, Lancashire and Theravance Biopharma.
Recently, global financial markets and indeed policymakers have been giving some mixed signals about what the path of growth, inflation and interest rates will be in the near future. Whilst some policymakers have been talking about the need to tighten policy, others have spoken about the requirement to ease further. Understandably, this has created some confusion, further uncertainty and volatility, especially in the fixed interest markets. Our view remains that the world economy will continue to be challenged by low growth and deflation and that interest rate increases are a long way off. Indeed, we expect to see further easing and more extraordinary monetary policy in the months and years ahead.
Nevertheless, we believe that the UK stock market should deliver low to mid-single digit returns from here, which although lower than recent history, is attractive when compared to what’s on offer from other asset classes. It is difficult to argue that the market is cheap, but there are still some tremendously attractive investment opportunities and the portfolio has evolved to exploit these. Consequently, we remain very confident that the CF Woodford Equity Income Fund is well-positioned to deliver the high-single digit long-term annualised returns for which we strive.
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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.
Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. Before investing in a fund, please read the Key Investor Information Document and Prospectus, and our Terms and Conditions. If you are unsure whether to invest, you should contact a financial adviser.The views and opinions contained herein are third party and may not necessarily represent views expressed or reflected by Willis Owen.
- 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