After a rocky start to the year, UK equities managed to post a positive return for the fourth consecutive month in May, despite uncertainty regarding the EU referendum weighing on stock market sentiment. This positive progress hasn’t been accompanied by an improvement in macro fundamentals, however, and earnings growth remains subdued.
The stock market appears to have been responding to vacillations in the expected outcome of June’s referendum on EU membership. During May, fears of ‘Brexit’ diminished somewhat as a number of opinion polls showed a stronger lead for the ‘remain’ campaign.
The fund delivered a positive return in May. The fund’s US biotech holdings generally performed very well over the month, with Prothena and Alkermes among the portfolio’s best performers. Prothena’s shares rose partially because some analysts have become more bullish about the prospects for its lead drug NEOD001, a treatment for a disease called Amyloidosis. Meanwhile, Alkermes continued to recover following the market’s over-reaction to a clinical trial disappointment in January.
AstraZeneca was another positive contributor as its shares moved modestly higher in response to progress in several areas of its business. The company announced positive phase 3 results for its metastatic breast cancer treatment, Faslodex. Also, earlier in the month, the company received encouraging feedback from the European Medicines Agency* on its combination treatment for type-2 diabetes, Otern. Overall, AstraZeneca continues to make significant progress in its value-enhancing transformation and we are extremely confident in the company’s long-term prospects. Elsewhere in the sector, BTG, Roche and Theravance Biopharma all contributed positively.
Financial stocks Legal & General and Provident Financial also performed well, following share price weakness in previous months. Additionally, support services provider Capita saw its share price rise as it reassured investors about its organic growth and stated that it is on track to achieve its revenue growth target of 4%. In the current economic climate, not many companies are able to deliver and sustain such an attractive rate of growth.
By contrast, Allied Minds performed poorly despite incrementally positive news, which highlighted the company’s progress towards crystallising commercial value. For example, one of its exciting investments, Federated Wireless announced that it had entered the final regulatory phase before marketing its innovative wireless connectivity technology in the US. We continue to view Allied Minds as a highly valuable company with considerable long-term potential that remains profoundly misunderstood and undervalued by the market.
Hostelworld was another detractor from performance. The company’s share price fell as the market reacted to weaker-than-expected first-half results. With carefully selected properties and a global footprint, we continue to expect the company to do well over the long-term, as it solidifies its position as the leading online hostel-booking platform in the world. Although the recent results were slightly disappointing, we continue to believe the market significantly undervalues its growth potential.
Game Digital also performed poorly despite making good progress with its multichannel digital engagement strategy through the acquisition of augmented reality company, Ads Reality. We expect the market for digital entertainment to increase significantly in the years to come as more consumers embrace the digital world to relax, communicate and learn. We remain positive on the company’s future prospects.
Within the unquoted element of the portfolio, we saw two downward revaluations. Both Evofem and Viamet moved to lower valuations to reflect a disappointing market reception to their planned IPOs
. Generally speaking, the market environment has been hostile for IPOs this year but, in both instances, we continue to see considerable long-term future value in these businesses.
Turning to portfolio activity, we added to several existing positions at what we consider to be very attractive valuation levels. These included Provident Financial, Next and, among the portfolio’s smaller positions Horizon Discovery, Verseon, BCA Marketplace and Circassia.
We also introduced Nexeon to the portfolio as a new unquoted position. The company was originally spun out of Imperial College London and focuses on developing silicon anode materials to replace carbon in rechargeable lithium ion batteries. Its technology has enormous potential to improve battery performance across a wide range of industries, including consumer electronics and the fast-growing electrical vehicles market. We are therefore excited about Nexeon’s ability to deliver very attractive long-term shareholder returns as it progresses towards commercialisation.
Elsewhere, we sold the position in BT. The decision was not prompted by a change in anything fundamental at the business. Indeed, we believe that the company is performing well and we support its strategy. For a while, we have had some concerns about its pension deficit and the relationship between the business and its regulator but these factors have not prompted the decision. It was driven by what we describe as the competition for capital in the portfolio as we balance the opportunity set for each position in the fund and build the exposure to stocks which we believe have the greatest return potential. In order to increase exposure to the best opportunities others have to be reduced.
Looking forward, it seems probable that the ‘Brexit’ debate will continue to dominate market sentiment in the near-term. As we have mentioned previously, our view is that the UK’s long-term economic outlook does not hinge on the outcome of next week’s referendum. We face a challenging economic future regardless of its outcome and we will not be changing the portfolio strategy if the country votes to leave or stay.
As such, we believe the portfolio is well-positioned to cope with the challenging environment that we foresee and remain confident that the fund will deliver attractive long-term returns to investors.
*The primary European agency for the evaluation of medicinal products (full name: The European Medicines Agency’s Committee for Medical Products for Human Use)
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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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