Global markets continued to rise in October, with relatively upbeat economic data allowing investors to shrug off political concerns in Europe and Asia. In Europe, the Catalonian parliament declared independence from Spain after a controversial referendum, prompting the Spanish government to impose direct rule on the province. In China, President Xi Jinping tightened his grip on power at the 19th Party Congress, a move that many see as having worrying implications for the direction of China’s reforms. These issues are unlikely to go away soon, but the market seems content to ignore them for now. As a result, the stocks and sectors that have done well so far in 2017 continued to outperform in October. They were joined by oil companies, which were helped by a firmer oil price.
Against this backdrop, the fund delivered a modestly positive return during the month. Among the positive contributors was Spire Healthcare. Its shares sold off in September after it lowered profit guidance for the full year in its interim results statement. In October, however, its share price bounced back, rising more than 30% following an opportunistic takeover bid from Mediclinic International, a global consolidator of private healthcare assets. Spire rejected the bid however, as it believes the proposed price significantly undervalues its prospects, an assessment with which we agree. However, given that Mediclinic already owns almost 30% of Spire Healthcare and that it has ambitions to continue to acquire private healthcare assets, a further bid is plausible. In the meantime, we remain confident in the long-term investment case for Spire as an independent business. The NHS is under increasing financial strain and this, alongside an aging population, will lead to more people turning towards private healthcare facilities, through private medical insurance, self-pay or through the NHS itself. As a well-invested provider of private hospital services, Spire is very well positioned to benefit from this long-term trend.
Another positive performer was Provident Financial. The company’s share price continued to recover in October, helped by an encouraging trading update, which provided early evidence that management’s plan to bring the company’s home collected credit division back on track, is beginning to work. Provident Financial’s other business divisions (Vanquis and Moneybarn) continue to perform well and the company’s capital and liquidity position looks solid. While the news in October was encouraging, there remains much work to be done to rehabilitate this business and its reputation in the stock market. The company has been significantly damaged by the problems in its household collected credit division but not irretrievably so. We remain supportive of the new management team’s strategy and added to the position during the month.
Less positively, Imperial Brands detracted from performance, but it is difficult to explain why, other than the shares are currently out of favour. From a fundamental perspective, Imperial Brands continues to be a business which should deliver attractive and sustainable long-term growth, as it has done consistently throughout its history as a quoted, independent business. The chart below clearly illustrates that Imperial Brands has been a spectacularly good long-term investment, with share price performance being underpinned by strong and dependable growth in cash flow, earnings and dividend.
Obviously, as we all know, past performance is not necessarily a reliable guide to the future, but from our perspective, the investment case has not changed dramatically. What has changed recently, is the stock market’s level of interest in the investment case – it simply does not fit with the current market zeitgeist, and consequently, its share price has declined by almost 20% over the last twelve months. Interestingly, although the impact of cumulative compound growth makes it difficult to discern in the chart, there have only been two occasions since 1996 when the 12-month share price performance has been more negative than it is at the moment – during the dotcom bubble of 1999-2000 and during the financial crisis of 2008-09.
As a result of the recent share price performance, Imperial Brands has revisited valuation territory that we haven’t seen in many years. The shares currently yield more than 6% which, for such a cash generative business with a long track record of delivering consistent growth, just looks like the wrong price. On a 5-year rolling basis, the shares have never delivered a negative return – clear evidence that, although fundamentals may not always be rewarded over short time periods, over more sensible time frames, they are all that matter. We remain very attracted to the long-term fundamental investment case and added to the position at these very appealing and unjustified share price levels.
UK retailer Next also saw its shares decline in October. The company reported a set of third quarter results which were slightly disappointing, with a weaker sales performance being attributed to unfavourable weather and the challenging trading environment for retailers more broadly. These issues should not have come as a huge surprise to the market but they did weigh on a share price which has been volatile this year. From a longer-term perspective, Next is an extremely well-managed, disciplined company with a well-invested asset base and healthy cash generation. Moreover, it returns the vast majority of its free cash flow to its shareholders. These attractions remain in place despite the recent trading update.
Turning to portfolio activity, we continued to add to the position in leading greetings card retailer Card Factory, following a positive meeting with the management team early in the month which augmented our conviction in the long-term investment case. We also added to several other positions, including Barratt Developments, British Land and Capita. These were funded through the disposal of two mid cap holdings, Equiniti and Lancashire. Equiniti has performed very strongly over the last couple of years and the position has now been sold to accommodate stocks which now look more attractively valued. Lancashire, meanwhile, has indicated that it will seek to deploy its capital in the firmer insurance rate environment that prevails in the aftermath of the severe hurricane season that we have just endured. Although we view this as a positive development because we believe the company will deliver an attractive return on this capital, its impact already appears to be fairly reflected in the price.
In terms of outlook, we believe the portfolio is very appropriately positioned for the current economic and market environment. We remain very confident in the fund’s ability to deliver very attractive total returns to investors, through a combination of dividend yield, sustainable dividend growth and, as the earlier-stage element of portfolio continues to mature, significant long-term capital appreciation.
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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.
Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. Before investing in a fund, please read the Key Investor Information Document and Prospectus, and our Terms and Conditions. If you are unsure whether to invest, you should contact a financial adviser.The views and opinions contained herein are third party and may not necessarily represent views expressed or reflected by Willis Owen.
- 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