February was another volatile month for equity markets. January’s extreme weakness persisted until mid-month, before stocks staged a tentative and lopsided recovery. As so often recently, flows proved more important than fundamentals, with another rotation out of so-called ‘defensive’ parts of the market and into commodity-related stocks. Meanwhile, fears grew that June’s referendum might lead to the UK leaving the European Union, causing the pound to weaken sharply.
The fund delivered a modestly positive return during the month, marginally outperforming the +0.8% total return from the FTSE All Share index. February always marks a busy period for company results and we have been pleased with the fundamental progress being made by the majority of the portfolio’s holdings. You can read more about the results delivered by the fund’s top 10 holdings here, along with our initial brief thoughts on their progress.
In some cases, this positive operational performance translated into a decent share price performance. Provident Financial, for example, now a FTSE 100 company, was the biggest positive contributor to the fund’s performance during February. The company released a great set of results, as reflected in its final dividend of 80.9p per share, an increase of 26.6% on the previous year. This helped its share price to normalise from the oversold levels reached in January. The company also issued a positive outlook statement, indicating that it is on track to continue to deliver strong growth.
Elsewhere among the fund’s larger holdings, the share prices of Reynolds American and Roche also responded positively to their final results but in several instances, share prices tended to ignore the release of financial results, suggesting that fundamentals are quite a long way down the list of market drivers at present.
AstraZeneca, for example, weakened after its results, but there was nothing wrong with the numbers, in our view. More broadly, its shares suffered in the sector rotation mentioned above, which had nothing to do with fundamentals. We had a meeting with Astra’s management just after the results and we continue to believe that they are doing all the right things to return the business to growth and create meaningful long-term shareholder value.
Capita also weakened sharply after issuing its full year results. The company continues to show strong organic growth, and both earnings and dividend growth remain at attractive levels. Investors appear to have focused on the company’s net debt, however, which came in slightly higher than expected and some analysts now fear that a rights issue may be required to delever (reduce the extent of debt) the balance sheet. We think that this is unlikely and are much less concerned about the strength of Capita’s balance sheet. We believe it remains well-placed to deliver very attractive rates of growth and can use excess cash flow to make value-accretive acquisitions as well as slowly reducing gearing over time.
Elsewhere, biotech firm Prothena continued to come under pressure after last year’s stellar gains. In the financial sector, Legal & General remained weak despite releasing more information about the quality and diversity of its annuity bond portfolio. We see its recent weakness as unjustified, given its strong cash generation, high yield and the fact that it looks well placed to deliver attractive rates of dividend growth.
More positively, shares in Purplebricks performed well, as the market continued to warm to the company’s long-term prospects following its IPO at the end of last year. Purplebricks released its first post-IPO trading statement at the end of January, reassuring investors that it is continuing to win market share. We remain attracted to the company’s solid long-term growth prospects and its increasingly dominant position in the online estate agency industry.
Another strong performer was 4D Pharma, which bucked the general weakness in its sector. There was no major news from the company, but it did make a small acquisition that extends its reach into using the microbiome for diagnosis as well as for the potential treatment of a widening range of conditions.
We introduced two new unquoted holdings to the portfolio during February. Perceptive Bioscience is an evergreen investor in early-stage businesses, with a focus on life sciences. We have known several members of its management team for some time and hold them in very high regard. The company is intending to use the capital it has raised to selectively finance medical innovation through all stages of its development, thereby speeding up the process of commercialisation and improving the probability of success.
Meanwhile, Mission Therapeutics is another healthcare business, which is looking to commercialise an emerging field of research with applications in a wide-range of conditions including Parkinson’s disease and several types of cancer. Deubiquitylating enzymes, as they are known, are attracting an increasing amount of commercial interest in the industry and we participated in a fund raising that gives Mission the capital it needs to advance its drug discovery platform and secure a market-leading presence in this exciting new field.
Elsewhere, we added to the holding in Imperial Innovations after a tranche of shares became available. This is a tightly held company whose share price had weakened at the start of the year. We continue to see the potential for significant long-term capital growth as Imperial Innovations’ portfolio of exciting investee companies continues to mature.
We also added to a range of other holdings at attractive valuation levels, including Beazley, Prothena and Alkermes. There were no material disposals from the portfolio during the month.
In terms of outlook, we are pleased by the operational progress of the portfolio evident in the current results season. The market has shown a tendency, of late, to be remarkably inconsistent in how it responds to positive (and indeed negative) fundamental news. This sort of dislocation can occur in the short term, but fundamentals always reassert themselves over time. This leaves us feeling very confident in the prospect of delivering attractively positive long-term returns to investors.
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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
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