The UK stock market reached new highs during March, with the FTSE 100 Index rising above 7,000 points for the first time. However, it failed to hold that level for long and declines towards the end of the month took the major UK indices back into negative territory for the month as a whole. The FTSE All Share Index delivered a total return of -1.7% during March 2015.
Many of the global themes that we have discussed in recent months continued to influence markets. After February’s brief rally, the oil price showed renewed weakness with other commodities following suit. Iron ore in particular, came under pressure as mining companies continued to increase supply in the face of slowing demand. The US Federal Reserve acknowledged the signs of deceleration in the US economy that have been evident all year due to dollar strength and as the shale oil boom goes into reverse.
In Europe, economic data has continued to exceed (albeit low) expectations but we are not convinced that this represents a sustainable recovery. The European Central Bank has embarked on its programme of quantitative easing (QE), but this is unlikely to solve Europe’s economic woes. On its own, QE can do little to improve underlying economic fundamentals. It has weakened the euro, but that does not conjure growth from thin air. Instead, it shifts growth temporarily from one region to another: in this case, seemingly from the US to Europe. Meanwhile, there has been little progress in the eurozone’s most acute and immediate problem, that of Greece. There remains no obvious way of reconciling the end to austerity for which Greece’s electorate voted and the attitudes of its creditors.
The portfolio delivered a robust performance in the face of the market declines. The biggest individual contribution yet again came from Allied Minds, which continued its strong run since its IPO in June last year. News from the company has been incrementally positive in recent months. In March, the firm announced a new company formation, BridgeSat, which is building an optical connectivity system to improve the wireless transfer of data from satellites.
The fund’s healthcare holdings also delivered some notable contributions, led by Prothena. The company announced positive results from clinical trials of PRX-002, a potential treatment for Parkinson’s disease. The trials have shown that the drug can safely reduce a protein in the brain that is thought to be linked to the condition. Whilst this is still in the early-stages of clinical development, the trial results are very encouraging and could ultimately allow a treatment that addresses the causes, rather than the symptoms, of Parkinson’s disease.
Roche, with whom Prothena is developing the drug, also performed well over the month. Roche’s share price weakened dramatically in January, in response to a surging Swiss franc as the Swiss National Bank ditched its euro peg. The currency normalised thereafter, as did much of the Swiss equity market, but anomalously, Roche initially failed to participate in that recovery but has recently been playing catch up. Elsewhere in the healthcare sector, AstraZeneca also performed well, briefly exceeding the highs reached last May during Pfizer’s failed bid approach.
Elsewhere, Spire Healthcare performed well on news that it had received planning permission to develop a new hospital in Nottingham and one of our early-stage healthcare businesses, Oxford Pharmascience delivered a very strong performance on news of further clinical progress. Oxford Pharmascience specialises in redeveloping medicines to make them better, safer and easier to take and is making positive progress on reduced gastric irritation versions of two existing non-steroidal anti-inflammatory drugs with well-documented gastrointestinal side effects.
Among the main detractors from performance were the fund’s tobacco holdings, Imperial Tobacco, British American Tobacco and Reynolds American. The weakness was related to unconfirmed reports late in the month that the US Federal Trade Commission (FTC) was unhappy about Reynolds American’s proposed acquisition of Lorillard on antitrust concerns. At the time of writing, there has been no formal decision from the FTC on this, and there has been more recent speculation that contradicts the earlier reports. However, the uncertainty was enough to unsettle Reynolds American’s share price in the short-term, along with that of British American Tobacco which owns 42% of Reynolds, and Imperial Tobacco which intends to acquire some of Reynolds’ and Lorillard’s brands as part of the deal.
During the quarter, we introduced a number of new holdings to the portfolio. We participated in the initial public offering (IPO) of Malin, an Irish company that has been created to acquire early-stage life sciences businesses and help them to fulfil their long-term potential. We hold the management team in high regard, having backed them previously at Elan.
We also added several new positions within the Financials sector. We participated in Haversham’s share placing, which will help fund the company’s acquisition of BCA (British Car Auctions) for £1.2bn. BCA is a high-quality business with a unique position in the used-vehicle marketplace and strong long-term prospects. We believe that the new management team is well placed to create significant shareholder value with a sensible growth strategy. Haversham has now been renamed BCA Marketplace as part of the transaction.
We initiated a position in VPC Specialty Lending which invests in online lending platforms, and added a small unquoted position in Ratesetter, the largest peer-to-peer lending platform in the UK.
Elsewhere, we took part in the IPO of Zegona, a new business set up by former Virgin Media executives to acquire underperforming telecoms businesses with a ‘buy-fix-sell’ strategy to deliver attractive long-term shareholder returns.
In terms of additions, we added meaningfully to the holding in Oakley Capital, which undertook a share placing in March to put it in a favourable position to exploit a number of investment opportunities it has identified. Similarly, we also took part in IP Group’s capital raising which is intended to accelerate its growth by increasing its ability to invest both in its existing portfolio of early-stage businesses and in new opportunities in the UK and US.
Meanwhile, we added to several existing positions at what we consider to be very attractive price levels, including Game Digital, Babcock International and Cranswick.
There were no disposals from the portfolio during March.
Looking forward, we are very excited about the long-term potential that exists in several of the portfolio’s new holdings. There is always an intense competition for capital within the portfolio, so new ideas have to show considerable appeal to merit inclusion. As such, we remain confident about the prospect for attractive 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.