Conditions in December were unusually volatile and trading volumes much higher than would normally be the case at that time of year. This was particularly the case during the first half of the month, during which the market lurched lower again in sympathy with the continued decline in the price of crude oil and many other commodities. Although it is widely expected that, ultimately, the lower price of oil will be a net benefit to the global economy, the market currently appears more alarmed by the deteriorating economic environment that is implied by the falling oil price.
As such, any shorter-term market participants positioned for a so-called “Santa Claus Rally” would perhaps have been feeling a little punch drunk by mid-month. Nevertheless, as with the previous correction in October last year, global stock markets very quickly regained their poise and, in the second half of the month, equities rallied – albeit in much thinner trading volumes.
The extent and rapidity of the earlier decline, however, coupled with the fact that the ‘relief’ rally occurred during the holiday season, leaves us feeling somewhat circumspect about near-term prospects as we head into 2015. Nevertheless, we continue to believe the portfolio is appropriately positioned for a challenging future, both short-term and, most importantly, long-term.
Amid the widespread market declines, the value of the portfolio held up relatively robustly, although many of the portfolio’s core holdings suffered share price falls. Some of the market’s movements were hard to explain. For example, in a month during which the price of Brent Crude Oil fell a further 20% in sterling terms, it is hard to fathom why the shares of companies like GlaxoSmithKline (-7.3%) or British American Tobacco (-7.8%), significantly underperformed Royal Dutch Shell (A shares +1.0%)*.
In most instances, the share price falls for the likes of GlaxoSmithKline and BAT were not driven by fundamentals but there were one or two exceptions. Roche, for example, contributed negatively due to the announcement of disappointing results from two clinical trials in therapies for breast cancer and Alzheimer’s. Despite these setbacks, we continue to view Roche shares as very attractively valued and took the opportunity to add to the holding.
Drax also negatively impacted performance when the Department of Energy & Climate Change (DECC) surprised the market and the UK electricity industry by issuing a consultation on changes to the grandfathering policy for future biomass co-firing and conversion projects under the Renewables Obligation.
Some of the portfolio’s smaller positions contributed very positively to performance. Shares in Allied Minds continued to rise, supported by a string of encouraging operational announcements earlier in the year and its recent admission to the FTSE 250 index. 4D Pharma and Spire Healthcare also performed well on no material news. Meanwhile, German residential property business, Gagfah performed well having received a bid from Deutsche Annington.
In terms of portfolio activity, we participated in the IPO’s of nanomedicine company Midatech Pharma, and Mercia Technologies, a Midlands-based technology commercialization business. We also added to our holding in animal health technology business, Benchmark, during its placing to raise funds to acquire the salmon breeding and genetics companies, SalmoBreed and Stofnfiskur.
Atom Bank also entered the portfolio during December as an unquoted position. Atom is a new UK online-only retail banking proposition. It has a very experienced management team which we believe is well-placed to capitalise on the opportunity to deliver a transformed consumer experience from a significantly lower cost base.
We increased our holding in US biotechnology business, Northwest Biotherapeutics. The company is developing personalised cancer vaccines using dendritic cells utilising its DCVax platform technology. Its lead program is a Phase III trial in an aggressive form of brain cancer and it also progressing a Phase I/II trial for all inoperable solid tumour cancers.
Elsewhere, we added slightly to our holding in Drax on the share price weakness that accompanied DECC’s recent policy consultation, highlighted above. Clearly, Drax is a business that is exposed to considerable political risk currently, but we remain confident in the underlying investment case as it becomes a predominantly biomass-fired generator, despite potential changes to the regulatory regime. Drax remains a strategically important asset in the UK electricity sector and we are confident in its ability to generate attractive returns for shareholders in the future.
We also continued to add to several other existing positions, including Babcock International, Centrica and Paypoint, at what we consider to be attractive valuation levels.
Looking forward, we expect next year to be challenging from an economic perspective, with the US representing a rare beacon of economic vitality compared to a rather lacklustre environment elsewhere. Even in the US, however, we look set to find out just how much of its recent economic outperformance has been the result of the shale boom in the months to come. The outlook for growth in Europe and several emerging markets looks particularly troubling though and we would expect fears of deflation to persist, if not intensify. Europe’s problems are not just economic though, but increasingly social and political, and the first of several tests this year of European policy makers’ determination to fulfil their ambition of “more Europe” will come later this month with elections in Greece.
So there’s lots to be cautious about in the near term but we continue to believe we can add value in these challenging conditions and remain confident the fund can deliver very attractive returns over the long-term.
* Source: Bloomberg in capital return, UK sterling terms for the month of December 2014.
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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