The month began with a sharp but unbalanced rally, with the UK market’s recovery from its low of 29 September being led by cyclical stocks – and commodity-related shares in particular. This seemed a rather odd reaction to the US Federal Reserve’s decision to leave interest rates unchanged in September – especially as the decision was largely explained by global economic uncertainty.
As has often been the case in recent months, market movements appeared to be driven by flows rather than fundamentals, with the commodity-related rally primarily due to a momentum reversal, as short-term investors fled from outperforming areas of the market, such as healthcare, into sectors that had underperformed so far this year.
Later in the month, however, this extreme market rotation subsided, allowing fundamentals to reassert themselves. Economic data continued to be largely disappointing, with US GDP growing by less than expected in the third quarter. In the UK, economic growth was also shown to have slowed somewhat in the third quarter. Meanwhile, inflation has continued to decline worldwide. With the exception of a six-month period in 2009, global inflation is now at its lowest level since records began in 1969.
Over the month as a whole, the FTSE All Share index increased by 4.7% in total return terms. Despite the tricky start to the month, the fund managed to marginally outperform the market as a whole.
A strong contribution from GlaxoSmithKline was welcome, with the share price boosted by some better-than-expected Q3 results. These were largely attributable to higher margins in its consumer healthcare business, which nevertheless remain well below those of its peers. This merely serves to illustrate the scale of the margin opportunity available to Glaxo here and hints at the substantial latent value the business as a whole.
Allied Minds also performed well, as it bounced back after being temporarily impacted in the short-selling attack in September. News from the company remained incrementally positive and included a successful fundraising for Precision Biopsy, one of the very interesting medical technology firms that Allied Minds has founded.
Elsewhere our tobacco holdings continued to contribute positively, as did BT, helped by good second-quarter results and the provisional approval of the company’s acquisition of EE. Provident Financial also performed well, with better-than-expected financial results driving further analyst upgrades.
Several health care stocks were among the largest detractors from performance, as Hillary Clinton’s comments about drug pricing continued to reverberate in the US market and beyond. BTG’s half year results disappointed the market, primarily due to the slow adoption of Varithena, its treatment for varicose veins, where reimbursement coverage in the US is taking longer to build than originally expected. This has impacted sales thus far but, with patient and physician feedback on the treatment remaining positive, we continue to see considerable future potential in Varithena as these reimbursement issues are resolved. Given this, its other on-market products and an interesting pipeline of future opportunities, we continue to view BTG as a compelling long-term growth story. We added to the position during the month.
Elsewhere, Northwest Biotherapeutics remained weak in October although the company did confirm that it was not aware of any fundamental reason for the share price decline. Meanwhile, in the same sector, Malin and 4D Pharma were also weak on no news.
In terms of portfolio activity, we materially added to the recently initiated position in US biotechnology company Theravance Biopharma at what we consider to be an extremely attractive valuation. The company was spun out of Theravance last year and it retains a valuable economic interest in the future commercial potential of the respiratory franchise being developed in partnership with GlaxoSmithKline. It also has some very interesting, albeit earlier-stage, assets in therapeutic areas such as chronic obstructive pulmonary disease (COPD), cardiovascular & renal disease.
We also participated in the IPO of Hostelworld, a hostel-focused online booking platform. We are attracted to its strong market position, strong cash generation and growth prospects. An unquoted position in Ombu, a technology development company, was also introduced to the portfolio. We have known the business for a long time, hold the management team in high regard, and see significant future long-term potential in several of the businesses it is already nurturing, in the fields of industry, energy, water and health care.
As in September, we continued to add to the position in AbbVie. The shares weakened further in the first three weeks of October amid concerns about the safety of its Viekira Pak treatment for hepatitis C. The drug’s label has since been changed to better reflect the risks. We viewed the share price decline as an overreaction and added to our holding at an exceptionally low valuation. We also added to Allied Minds, Northwest Biotherapeutics and Roche.
As we move into the closing weeks of 2015, we see plenty of reasons to expect continued volatility. The narrow and uneven nature of the equity rally in recent weeks suggests it is fragile, as does the behaviour of other asset classes. In areas such as emerging markets and high yield credit, recent price action has been much less robust, perhaps reflecting a gradual deterioration in global liquidity conditions which can only worsen if the Federal Reserve chooses to raise interest rates in the near future.
Nevertheless, we believe we have a very appropriate strategy for the current conditions. The core of the portfolio remains positioned towards attractively valued, dependable growth opportunities which are capable of delivering growth even in the difficult macroeconomic environment that we foresee. Meanwhile, the fortunes of our smaller positions in earlier-stage companies with considerable long-term growth potential will be largely determined by their own progress, not by macroeconomic factors. On balance, therefore, we remain confident in the portfolio’s ability to continue to deliver attractively positive long-term returns.
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.