Global equity markets appeared determined to grind higher in May. There was some better economic data to support this, primarily in Europe, but we don’t believe the recent signs of stronger growth are a forerunner of significantly better fundamentals. The UK stock markets’ strength has piggy-backed this benign global equity environment, despite heightened domestic uncertainty around the UK’s general election and talk of a hard Brexit. The UK market does at least appear reasonably well underpinned by valuation, particularly when considering the absence of alternatives from an income perspective.
The fund delivered a solid positive return during the month, with the largest positive contribution coming from the portfolio’s largest holding, AstraZeneca. It announced positive results from an interim analysis of the Phase III Pacific trial, which is investigating its immuno-oncology asset Imfinzi (the trademark for durvalumab) for the treatment of non-small cell lung cancer. Recently, the market has been preoccupied with the company’s ongoing Mystic trial, in which Imfinzi is being assessed in combination with another immuno-oncology therapy, tremelimumab. As a result, analysts have completely overlooked the Pacific trial’s potential, as reflected in the immediate response to this news, which saw AstraZeneca’s share price rise more than 10%. To be fair, we too had underestimated the opportunity that the Pacific trial may lead to, with Astra now having a significant lead over competitors in this area. We have, however, consistently believed that, although Mystic is important, there is substantially more to the AstraZeneca development pipeline than that one trial.
Unquoted healthcare business, Immunocore, also announced some very encouraging trial data which resulted in a valuation uplift. Readers may remember that we focused enthusiastically on the opportunity that lies ahead for Immunocore in a Patient Capital company spotlight last year. Last week, the company attended the world’s biggest oncology conference, ASCO (American Society for Clinical Oncology), and presented compelling data from its lead programme, investigating IMCgp100 in metastatic uveal melanoma, a rare eye disease with no current treatment options. The data shows a meaningful improvement in progression free survival for patients with the condition. Effectively, this means that the drug doubles the length of time the condition stays stable without progressing further. With the drug already having orphan drug designation in the US, the company now intends to rapidly progress the treatment through clinical development to make it commercially available to patients as soon as possible. This is clearly great news for Immunocore, and the valuation at which the position is held within the portfolio had already been uplifted to reflect the positive nature of the data. Looking forward, we remain very confident that Immunocore can deliver significant further growth as it progresses towards the commercialisation of its highly promising technology and advances additional development candidates towards the clinic.
Purplebricks, the hybrid property agent, was another strong performer, with its shares up almost 40%. During the month, the company issued a positive trading update, highlighting continued strong UK growth and good progress in its Australian business. We think that the market has been slightly behind the curve with Purplebricks and is only now starting to appreciate the company’s success in muscling its way into a position of market dominance. We continue to believe that there is much more room to grow for the company in the months and years ahead.
Shares in British American Tobacco reached an all-time high during the month, in contrast to its tobacco peer Imperial Brands, which fell back. We continue to be attracted to both companies for their dependable growth characteristics, but Imperial Brands now looks by far the more appealingly valued of the two. Malin’s shares performed well after the conclusion of a fund-raising round, and stocks such as Burford, Stobart and Breedon also hit all-time highs.
Along with Imperial Brands, the main detractors were US biotech stocks Theravance Biopharma and Prothena. Although both registered share price declines over the month, there was no fundamental justification for either move. We think that this was simply a continuation of the volatility that has characterised the US biotech sector in recent times. Looking beyond the near-term noise, we continue to see substantial long-term potential in both companies.
Turning to portfolio activity, we participated in a number of placings during the month, including Countryside Properties, a new position for the portfolio. Countryside is a well-managed property construction and development business which has a close relationship with the public sector, specialising in improving social housing. We see the company as extremely well placed to deliver strong growth. Elsewhere, we participated in placings for intellectual property commercialisation businesses Malin and IP Group and the consumer finance investment business, Honeycomb Investment Trust.
Furthermore, we added to several other positions including Barratt Developments, British Land, Taylor Wimpey and Lloyds. All of these additions are a product of our contrarian view on the UK economy, which we believe is well situated for a prolonged period of benign growth and low inflation.
These additions were funded by reducing the portfolio’s position in British American Tobacco which now looks as fully valued as it has ever done in modern market history. In some respects, we are reluctant to reduce our exposure to such a high quality, dependable growth business, but its valuation makes it an obvious candidate to reduce in the ongoing fight for capital. We also trimmed the position in G4S following strong share price performance in recent months.
Turning to the investment backdrop, we remain cautious on the outlook for the global economy despite the market’s lingering optimism on growth. Meanwhile, we continue to warm to the prospects for the domestic economy, in contrast to an increasingly bearish consensus. The UK election result doesn’t change the fundamentally positive backdrop for the UK economy, in our view. Indeed, with its implications for looser fiscal policy and a softer Brexit, the UK economic outlook appears to have improved still further and the portfolio is positioned to benefit from this outcome over the long term.
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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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