July commenced with risk assets still reeling from the impact of events in Greece, where the debt crisis was seemingly moving towards its final scenes. Although markets were becalmed by the eventual arrival of another bail-out deal in mid-month, this only buys Greece a few more months and the situation remains, therefore, very much unresolved.
As the month progressed, sighs of relief over Greece were replaced by growing concerns about the interest-rate cycle in both the US and the UK, where central bankers appear to be preparing markets for rate hikes in the months ahead. We are not convinced that macroeconomic data has been robust enough to justify such a move and are concerned that the risk of a policy error is growing.
Meanwhile, events in China have also been troubling and may prove even more important for the outlook for the global economy. The bursting of its equity bubble has wiped more than $3trn off China’s market capitalisation since peaking in June and this already appears to be having an impact on the real economy. Purchasing managers’ indices and power-consumption data indicate further weakness in the Chinese economy, which has contributed to a renewed decline in commodity prices.
In this volatile environment, the fund’s focus on dependable growth companies was beneficial, as was its avoidance of more cyclical exposure. This was reflected in a very robust return from the portfolio during July and outperformance of the FTSE All Share index. In particular, it was encouraging to see the core of the portfolio contributing positively, with major contributions from our tobacco and pharmaceutical holdings.
Our tobacco holdings were helped by positive second quarter results from Reynolds American, which comfortably beat market expectations and raised earnings guidance for its full financial year. British American Tobacco also performed well, after announcing strong interim results that showcased the company’s focus on tight cost controls, shareholder returns and served to remind investors of the tobacco industry’s enviable pricing power. In the pharmaceuticals sector, both AstraZeneca and GlaxoSmithKline also benefited from positive financial results towards the end of the month.
Elsewhere, Prothena was again a standout. The stock was up +26% in July in sterling terms and has more than trebled year-to-date, reflecting the clinical progress of its major assets, new potential treatments for amyloidosis and Parkinson’s disease.
We also saw a meaningful contribution from one of our unquoted holdings – Purplebricks, the hybrid estate agency, which combines the best of online and offline services to fundamentally change the way in which we buy and sell houses in the UK. The company has made substantial progress since our initial investment in August 2014, leading to a further funding round which valued the company at £140m. We participated in the funding round to add to our holding at a price more than four times higher than our initial investment. We continue to view the long-term prospects for the business positively as it rolls out its full national marketing campaign and further consolidates its number one position in the online / hybrid estate agency market – it now sells more properties than all the leading online agents put together.
Allied Minds was the largest detractor in July, as the stock continued to unwind some of its very strong performance earlier in the year. Rolls-Royce was also weak at the start of the month, following the first trading statement after the arrival of its new chief executive, Warren East. Over the long term, the company continues to offer substantial scope for capital growth as it executes its strong forward order book and improves profitability. We added to the holding progressively throughout the month.
Another clear negative over the month was Drax, which was a major casualty of the UK Budget, in which the Climate Change Levy exemption for renewable energy was abolished. This decision is very frustrating, as significant capital has been committed by Drax to convert part of its power station from coal to biomass, following a long-term commitment from Government to allow an appropriately attractive long-term return. The Government is now going back on that commitment with negative implications for Drax. Despite this, we added modestly to the holding at a very depressed share price level and continue to view it as a strategically important asset in the UK electricity generation sector.
Other positions we added to during the month included Legal & General, Lancashire, G4S, Idex and BT. We also participated in P2P Global’s latest C share offering, which raises further capital for the team to invest in online peer-to-peer lending credit assets. The capital raised in its previous C share issue in January has now been substantially deployed, so those shares have been converted into ordinary shares.
Meanwhile, a very small position in speciality plastics business, Essentra, was initiated and two new unquoted positions, Immunocore and Mereo Biopharma entered the portfolio.
Immunocore is a clinical stage biotechnology company with some very exciting technology, developed initially at Oxford University, in the fast evolving field of immuno-oncology. It is developing therapies with the potential to treat a variety of cancers, viral infections and autoimmune diseases, with its lead clinical programme producing positive results in early stage trials in patients with advanced metastatic cutaneous and ocular melanoma earlier this year.
Mereo Biopharma, meanwhile, has been formed to acquire drug portfolios discovered by major pharmaceuticals companies and manage them through later-stage clinical trials. It has recently acquired three programmes from Novartis.
In terms of disposal, we sold the portfolio’s holding in SSE during July, due to increasing concerns about the company’s ability to grow its cash earnings. Historically, we have viewed SSE positively due to its unwavering focus on shareholder returns and, in particular, the dividend. However, more recently, we have started to become concerned that it may struggle to continue this strong track record. At the current valuation, we see little upside and have therefore decided to sell. Elsewhere, we slightly reduced the position in Royal Mail, after a strong run in the shares.
The core of the portfolio remains positioned towards attractively valued, dependable growth opportunities, which are capable of delivering growth even in the difficult macroeconomic environment that we foresee. Meanwhile, the fortunes of our smaller positions in earlier-stage companies with considerable long-term growth potential will be largely determined by their own progress, not by macroeconomic factors. On balance, therefore, we remain confident in the portfolio’s ability to continue to deliver attractively positive long-term returns.
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 views and opinions contained herein are third party and may not necessarily represent views expressed or reflected by Willis Owen.