Global stock markets ended the year on a subdued note. Equities were particularly weak in the first half of the month, in the run-up to the Federal Reserve’s decision to raise interest rates for the first time in almost a decade. Although improving economic conditions in the US might justify this move from a domestic standpoint, we are worried about the impact that it may have on the rest of the world – and on emerging markets in particular.
Further falls in commodity prices accompanied the tighter global liquidity conditions and added to the negative sentiment in the markets, with the oil price reaching fresh five-year lows. Later in the month, there was a modest ‘Santa rally’ in equity prices, but this was not accompanied by any significant fundamental justification.
The fund’s net asset value declined modestly over the month, marginally underperforming the FTSE All Share’s decline of -1.27% in total return terms. December’s best stock level contribution came from car accident management service company, Redde. The shares have performed consistently well all year, supported by strong operational performance and a series of upward revisions to its profit forecasts. This continued to be the case in December’s update which confirmed that the company is trading ahead of expectations and its recent acquisition of outsourced fleet management business, FMG, is proceeding well and has provided a strong pipeline of new business opportunities. We remain attracted to Redde’s strong cash generation which should continue to underpin attractive levels of long-term dividend growth.
AA also performed well, following a period of weakness in recent months. Its shares were helped by a deal through which a private equity business, CVC, took a controlling stake in RAC, AA’s main competitor. The deal serves to highlight the attractive valuation on which AA currently trades.
There was also a solid contribution from our large pharmaceutical company exposure, with modest share price gains from the likes of Roche, AstraZeneca and GlaxoSmithKline during the month. Shares in BTG also rose on FDA approval of Vistogard, which is used to treat chemotherapy overdoses. There was also positive data from the phase-III trials of the company’s PneumRx Coil, a lung implant for patients with severe emphysema.
The performance of the portfolio’s US biotech stocks was more mixed. Alkermes made a strong contribution, helped by a positive pipeline update that confirmed good progress in several of its treatments for diseases of the central nervous system. Northwest Biotherapeutics weakened, however, as the company came under increasing pressure to investigate recent allegations of financial improprieties and regulatory failure. We have engaged with the board on this matter and, in a public filing to the U.S. Securities and Exchange Commission, we called for the appointment of an independent non-executive director and the convening of a special committee to investigate the allegations. According to the company, an investigation has commenced and we await its findings.
December’s largest detractor was Game Digital, which fell by 45% after a profit warning citing poor Christmas sales due to the changing habits of their ‘gamer’ customers. This is clearly disappointing but we have retained the position in the portfolio, believing the share price falls to be overdone. The company went into administration in 2012, and the market appears to fear that the same fate awaits it again. The business is in a much stronger position now, however. There is still a considerable amount of cash on the balance sheet and they operate with short leases – both of which are positive differentiators compared to the company’s historic predicament. Elsewhere, the share prices of some of 2015’s strongest performers slipped back slightly on profit-taking, including Provident Financial, BT and British American Tobacco.
In terms of portfolio activity, we took part in a fund raising for CityFibre, which is acquiring national infrastructure assets from KCOM. CityFibre is a leading owner and operator of fibre optic telecommunications infrastructure in the UK and this deal expands its footprint to 36 cities and major towns in the UK and accelerates the company’s growth plans.
We also took part in a share placing in Stobart, a business that we have known well for a long time. The company has raised further capital to facilitate a property transaction that should allow its innovative management team to continue to build long-term shareholder value. Sabina Estates, a property development business investing in high quality residences in Ibiza, also joined the portfolio as an unquoted holding.
Elsewhere, we added to hybrid estate agency, Purplebricks, as it made the transition from an unlisted to listed holding, via its IPO. This also involved a further uplift in the valuation of the position. Purplebricks already sells more properties than all the main online agents combined and its IPO is the latest step as it seeks to cement its leading position in the UK.
We also participated in a placing by Benchmark. This facilitates the reverse takeover of INVE Aquaculture, a significant deal that gives Benchmark much greater scale and creates a global leader in aquaculture technology. Meanwhile, we topped up on several larger holdings at attractive valuation levels, including GlaxoSmithKline, Roche and Drax.
We reduced the position in Royal Mail during the month. Although it is still an attractively valued business, in our view, amongst other issues, the regulatory environment has become less favourable and so the holding was reduced slightly to raise capital for other opportunities. There were no other major disposals during the month.
Looking forward into 2016, the start of a new year is often seen as a time for (often ultimately misplaced) optimism, but financial markets have started this year most unsteadily. This reflects growing concern about the health of the global economy in an environment of tighter international liquidity. These are not new issues but the market appears to have taken the turning of the calendar year as an opportunity to reassess them and, in doing so, it has drawn some negative conclusions.
In our view, economic conditions are unlikely to improve any time soon – in fact, they may get worse before they get better. We can be less sure about the length of time over which financial markets fret about these issues – after all, stock markets have demonstrated a remarkable complacency about these global macroeconomic challenges in the past and they may do so again. However, we would caution that 2016 is shaping up to be another tough year for equity markets but strongly believe that the portfolio is well-suited to these conditions and continue to view the future with confidence.
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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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