November was a lacklustre month for global equity markets with nervousness, amongst other things, about the prospect of imminent US rate hikes dampening sentiment. Markets remained in no mood for disappointment, with the share price of any company that fails to meet expectations being treated very severely. Oil and metal prices continued to fall heavily over the month, dragging down the share prices of commodity-related companies. Dispersion between the best and worst performing stocks in the market has been high recently, however, allowing the main UK indices to post modest gains over the month as a whole.
The fund delivered a solid gain during November, outperforming the FTSE All Share Index. The largest performance contribution came from US biotech company, Prothena. As excitement grew about the potential of its treatment for AL amyloidosis, the company’s share price surged by over 40% in sterling terms, to reach a new all-time high towards the end of the month. Further trial data on NEOD001 is expected in the first half of 2016, and optimism about the drug’s prospects led to a flurry of broker upgrades. Meanwhile, PRX002, the Parkinson’s candidate that the company is developing in collaboration with Roche, is attracting more attention as it progresses through its first-phase trials.
Elsewhere amongst our US biotech holdings, Northwest Biotherapeutics slipped slightly as the market digested news of a public filing we made to the U.S. Securities and Exchange Commission. You can read more on this issue in Neil’s blog article
. Meanwhile, Theravance Biopharma and Alkermes also performed robustly, allowing our US biotech holdings to, on balance, deliver a strong contribution, as they have done over the year as a whole.
AstraZeneca was another notable contributor. Early in the month, the company’s third-quarter results came in ahead of expectations, and it raised guidance for the full year. More significantly, Tagrisso, Astra’s new lung cancer treatment, received approval from the US Food & Drug Administration for use in patients with certain types of late-stage disease. Delays to the development of a competitor drug from Clovis Oncology gives Astra the opportunity to build a dominant position in this market, with a longer lead-time. Tagrisso is just one of several new cancer drugs that AstraZeneca is aiming to bring to market by 2020.
Two holdings with exposure to defence spending also performed well. BAE Systems has been under pressure from public sector retrenchment for several years. Now, however, this pressure has eased in the US, and the UK appears to be following suit. The UK Government’s Strategic Defence & Security Review (SDSR) provided a much clearer and positive view on the outlook for defence spending in the UK, with BAE poised to benefit. Babcock International, which has considerable exposure to defence spending support services, was also boosted by both the SDSR and its own better-than-expected results.
The largest detractor from performance was Rolls-Royce, which issued its fifth profit warning in two years. The company’s problems, which initially had affected the military aerospace and marine businesses, now appear to have spread to the core civil aerospace business. This has resulted in material downgrades to profit and cash expectations, and to such an extent that it is now likely that the dividend will be cut in 2016. This has shaken our confidence in the investment case and the position has been sold.
Allied Minds also detracted from returns despite some positive incremental news flow from its portfolio company, Federated Wireless. Elsewhere, shares in Spire Healthcare slipped after the company issued a disappointing trading update. Although Spire is delivering good growth, its NHS local contract business is under some short-term pressure. The rest of the business is performing well, however, and we took advantage of the share price declines to add to the position.
Elsewhere in terms of portfolio activity, we continued to add to the holdings in AbbVie and Roche at what we consider to be very attractive valuation levels. We also added to BTG and Vernalis, both of which have come under pressure recently as they move through the early-stages of commercialising recently approved drugs. We also participated in share placings for Xeros which continues to make positive progress in commercialising its disruptive polymer bead technology in the commercial laundry industry, and in hVivo which has raised funds to help progress PrEP-001, a novel prophylactic treatment for respiratory infections, into phase II trials.
We also increased the position in Breedon Aggregates, which placed shares to help finance its transformational acquisition of Hope Construction. Breedon has a strong management team with an excellent track record of creating shareholder value through organic growth and by consolidating the UK’s fragmented aggregates industry. This latest acquisition creates Britain’s largest independent building materials group.
Other than the exit from Rolls-Royce mentioned above, there were no material disposals.
What are the risks?
- The value of investments and any income from them may go down as well as up, so you may get back less than you invested
- Past performance cannot be relied upon as a guide to future performance
- The annual management charge applicable to the fund is charged to capital, so the income of the fund may be higher but capital growth may be restricted or capital may be eroded
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.