After several months of protracted and fruitless negotiations between Greece and its creditors, the Greek debt crisis seemed to be moving towards its final scenes at the end of June. Talks broke down completely with the Greek government announcing a snap referendum on whether or not the country should accept the latest bailout proposals. This caused risk assets to sell-off towards the end of June, suggesting that the consensus view had complacently assumed a deal would be forthcoming at the last hour.
The unfolding crisis in southern Europe compounded the effects of other global uncertainties. There were renewed concerns about the timing of the US Federal Reserve’s first rate rise since 2006, as US economic data improved, with new job openings shown to have hit a 14-year high in April. In China, meanwhile, worries about a slowing economy grew, and the country’s equity markets, where fears of a bubble had been increasing, corrected sharply.
Our concern about the outlook for the global economy has informed a cautious long-term investment strategy, which served the fund relatively well during June. There was particular strength among our US biotech holdings, Prothena, Northwest Biotherapeutics and Alkermes. There is growing excitement about the drugs that Prothena is developing to combat amyloidosis and Parkinson’s disease, as well as the potential for Northwest’s personalised cancer vaccines. Meanwhile, Alkermes has been making good progress with clinical trials for a new schizophrenia treatment. Although the enthusiasm for US biotech stocks has led to several of them trading on bubble-like valuations, we have focused our exposure on stocks where we believe future potential is significantly undervalued by the market – Prothena, Northwest Biotherapeutics and Alkermes, all trade on valuations more in line with those we see on this side of the Atlantic.
Nevertheless, many of our larger holdings saw share price declines during the month and the fund was unable to avoid a negative return in volatile conditions. GlaxoSmithKline and AstraZeneca were again among the main detractors, further highlighting the discrepancy in attitudes between UK and US investors towards the pharmaceutical & biotechnology industries. Imperial Tobacco also lost ground having surged on the approval of the Reynolds/Lorillard deal in late May.
Among our unquoted holdings, we saw a material uplift in the value of Oxford Nanopore, which is developing next generation technology for molecular diagnostics, with DNA sequencing being the first application. The company continues to make great progress with its technology, with its “London Calling” conference in May marking the commercial launch of its portable MinION DNA sequencing device. As a result of operational milestones being met and growing confidence in the technology commercially, the price at which we hold Oxford Nanopore has increased by 39%. Conversely, the value of Biofem was reduced by almost 30% due to disappointing delays in its dermatological business.
In terms of portfolio activity, we introduced a new holding to the portfolio in the form of NewRiver Retail. We participated in its share placing to raise £150m to finance its current transaction and development pipeline, following a very positive meeting with management. In general terms, property is not an asset class that we are particularly interested in but NewRiver has specific attractions. It has a great track record of creating value by improving its second and third tier retail property assets. The business generates excellent returns and has the potential to deliver a very attractive income stream to the portfolio as well as long-term capital growth. We also invested in Proton Partners International which is opening three proton beam therapy centres in what we hope represents a significant breakthrough to the UK’s provision of cancer treatment.
Among our existing positions, we participated in Circassia’s recent issue of equity to finance two acquisitions which accelerate the company’s ambitions to build a world-leading speciality allergy and asthma pharma business. We added to Atom Bank, the digital challenger bank, committing the second tranche of our original investment, which was conditional on it receiving certain regulatory approvals – it received its banking licence during the month. We also added to several core holdings including Centrica, Homeserve, Imperial Tobacco and Next. There were no material disposals during the month.
In terms of outlook, the situation in Greece remains uncertain – we recently wrote about the eurozone crisis and compared the Greek’s democratic approach to the rest of Europe’s dysfunctional bureaucracy. Since then, a deal has been struck but the nature of the negotiations more closely resembled mobocracy than democracy and it is difficult to see how Greece can pass the terms of the bail-out through its parliament, let alone implement such harsh reforms. Events in China, however, may be more important for the outlook for the global economy. The bursting of its equity market bubble has, at the time of writing, wiped over $3trn off China’s market capitalisation in a month. That is 13 times Greece’s GDP in 2014!
Recent events therefore vindicate continued caution on the long-term global economic outlook. Although there is good reason to expect further volatility as we move through the summer months, over sensible time horizons, we remain very confident in our ability to deliver attractively positive returns to investors.
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.