Performance since launch

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LF Woodford Equity Income Fund

The LF Woodford Equity Income Fund was launched in June 2014. After a good start to performance in 2014 and 2015, during which time the fund delivered a positive return against a broadly flat UK stock market, conditions have become increasingly challenging.

We believe it is important that investors understand the drivers of this under-performance, which is explained below.

Stock specifics

There have been some stock specific issues to contend with during this time, at companies such as Provident Financial, Prothena and Capita, which have been well-documented on our website. Contemporary views of these businesses and many others, are provided on our investment case summary pages with the context of history. There is no doubt that owning these stocks has been unhelpful to performance. It would be wrong to conclude, however, that the fund’s under-performance can be solely attributed to these stock specific issues, as the data below demonstrates.

Top five performance contributors

Company Average
weight (%)
Performance
contribution (%)
Burford Capital 3.1 4.0
AstraZeneca 5.1 2.4
British American Tobacco 2.5 2.1
Legal & General 3.8 1.5
Industrial Heat 0.6 1.4

Bottom five performance contributors

Company Average
weight (%)
Performance
contribution (%)
Provident Financial 4.2 -4.5
Prothena 2.6 -2.5
Allied Minds 1.1 -2.2
Capita 1.6 -1.8
Purplebricks 1.9 -1.5

Source: Northern Trust on a total return basis over the three years to 31 March 2019

Fund performance contributions are calculated on a total return basis, including the impact of intra-period trading, gross of fees in sterling using closing prices. Contribution totals may therefore not match fund performance data from other data sources which may be based on midday prices, net of fees. Values do not always sum due to rounding.

Three years of momentum

Something much more significant has been happening in markets progressively, over the last three years, which has made conditions increasingly difficult for our long-term, valuation-oriented investment approach. The road towards long-term outperformance in a volatile asset class is rarely a smooth one, but the extent of the difference between the performance of the funds and that of the broader UK market has been unusually extreme.

During this time, global equity markets have moved decisively into the late stages of this bull market, with conditions becoming increasingly momentum-driven. Momentum investing involves buying assets when they have risen in price, and selling assets when the price has fallen, with little or no regard paid to the fundamental value of those assets. It is the anti-thesis of our fundamentally-anchored investment approach which will, as a result, tend to under-perform in such conditions.

In the UK, this momentum has manifested itself in a narrow fixation on resource-related companies and other large Asian-exposed businesses, seen as beneficiaries of a reflationary global growth scenario that we simply did not (and do not) believe in. In the three years to 31 March 2019, more than two-thirds of the total return delivered by the FTSE All Share index came from just ten stocks, all of them large index constituents which have very little to do with the UK economy.

FTSE All Share index: 3 years to 31 March 2019
Top 10 positive contributors Index weight (%) Contribution (%)
Royal Dutch Shell 8.06 4.88
HSBC 5.69 3.18
BP 4.06 2.95
Rio Tinto 1.74 2.00
AstraZeneca 2.79 1.83
Diageo 2.62 1.81
BHP 1.25 1.44
GlaxoSmithKline 3.24 1.12
Glencore 1.50 1.08
Unilever 2.00 0.98
Total of top 10 32.98 21.29
The rest (727 stocks) 67.02 10.35
Whole index 100.00 31.64

Source: Bloomberg, Woodford

This has come despite increasing evidence of problems in many emerging market economies, most prominently, China. The fund has very little exposure to these parts of the market because of macroeconomic concerns and on valuation grounds. This lack of exposure to sectors such as Basic Materials, Oil & Gas, Consumer Goods and large financial groups such as HSBC, explains a significant proportion of the fund’s under-performance.

Over the last nine months, this momentum has shown signs of faltering. The fund has at times benefited from avoiding areas of valuation excess and the stocks most vulnerable to the deteriorating global economic environment. However, one other performance factor, which has remained a headwind to performance, is worth explaining.

Domestic opportunity

We have seen a very attractive investment opportunity emerging over the course of the last two years, in domestically-exposed stocks, such as housebuilders, construction and commercial property companies. These have been increasingly out-of-favour since the UK voted to leave the European Union in June 2016.

As the negotiations with Europe have progressed, uncertainty about the path of the UK’s future relationship with Europe has increased. Within the UK stock market, a significant gap has, in turn, opened up between the performance and valuation of international-facing stocks and domestically-exposed stocks. The fund has progressively increased its exposure to the latter, selectively focusing on stocks which are pricing in an overly bleak scenario for the UK’s economic future.

Dollar-earners have substantially out-performed domestically-focused businesses since the Brexit vote

Source: Bloomberg, Woodford

The market’s persistent antipathy towards UK-exposed stocks means this part of the strategy has not yet paid off. Indeed, these stocks have been another key cause of the fund’s underperformance, particularly over the last few months. The companies themselves have done very little wrong during this period – some of them have delivered excellent operational results – but this has counted for nothing given the continued negativity towards UK-exposed stocks.

By way of example, we point to the housebuilder, Barratt Developments, which released a strong set of interim results in February. The company is delivering solid growth, has a very strong balance sheet and is generating a substantial amount of cash. This allows it to pay a very attractive dividend to shareholders, which, at the time of writing equates to a yield of more than 7% per annum. The shares look incredibly cheap from a fundamental perspective and the same or similar applies to the share prices of many housebuilders and other companies that derive the majority of their revenues in the UK economy and that are held in the portfolio.

In many respects, the momentum behind the index and the domestic opportunity that the funds are positioned to exploit, are two sides of the same coin. In running towards the global-facing, dollar-earners, market participants have been running away from domestic exposure at increasing speed. This has created a very attractive valuation opportunity and, although it has been painful for performance as the opportunity has unfolded, we remain convinced that the fund will ultimately be significantly rewarded for this element of the strategy.

A constant investment approach…

This is, of course, exactly the sort of market inefficiency that Neil has exploited throughout his career. This has resulted in different portfolio shapes at different times, as Neil’s strategy evolves to take advantage of the prevailing investment opportunity set.

Neil’s fundamental investment approach has not changed – put simply, it is focused on identifying areas of under-valuation (opportunity) and avoiding areas of over-valuation (risk). Avoiding risk is a very important ingredient in delivering long-term out-performance. It helped Neil to avoid the banks in the run-up to the global financial crisis. It also helped Neil avoid the bubble that emerged in technology-related stocks in the late 1990s. Indeed, Neil’s performance challenges in the late 1990s (and, ultimately, his success in the early 2000s, when the tech-bubble burst), are highly reminiscent of the problems the fund has faced recently.

Neil’s portfolios then were heavily exposed to mid and small sized companies, as they are today. In order to avoid the risk that was most evident in large companies, Neil had to look further down the market cap spectrum to find attractive investment opportunities. This helped Neil to avoid the bubble and when it burst, the broader UK stock market performed very poorly for a long period, but Neil’s funds continued to deliver attractive returns.

…but a gradually evolving strategy

We believe a very similar situation has emerged over the last few years. In our view, the broad UK stock market (and indeed equity markets globally) carries substantial risk at the moment, as a result of the momentum that we have described above. The corollary of this is that substantially all of the attractive opportunities we see ahead are in small and mid-sized companies. This explains why the fund has gradually decreased its exposure to larger-sized companies over the last three years, and has become increasingly exposed to the more attractive opportunities in smaller companies.

The result is a portfolio that has a selective bias towards profoundly undervalued companies that are exposed to the UK economy. The fund is also positioned to capture an exciting long-term opportunity across a range of earlier-stage businesses exposed to the themes of healthcare innovation and disruptive technology more broadly.

We can understand that many investors may be disappointed at the returns delivered by the fund. We share that disappointment. We remain absolutely confident, however, that the disciplined investment approach that has served Neil Woodford and his investors well for more than thirty years, is determining an investment strategy that is very appropriate for the economic and market environment that confronts us. We believe the fund will deliver positive and attractive returns to investors in the years ahead.

Fund performance

As at 30 April 2019

Performance

Source: Financial Express, Woodford

Performance summary
  1 month 3 months Year-to-date 1 year 3 years Since launch
(19/06/2014)
LF Woodford Equity Income (C Acc) 1.18 -1.17 2.86 -8.33 -6.78 11.00
FTSE All Share index 2.68 7.84 12.35 2.62 33.33 34.10
IA UK All Companies sector average 4.48 8.05 13.90 1.18 29.16 34.10
Standardised performance (%)
  01/04/14
to 31/03/15
01/04/15
to 31/03/16
01/04/16
to 31/03/17
01/04/17
to 31/03/18
01/04/18
to 31/03/19
LF Woodford Equity Income (C Acc) - 2.64 12.57 -13.49 -5.47
FTSE All Share index - -3.92 21.95 1.25 6.36

Past performance cannot be relied upon as a guide to future performance.
Source: Financial Express on a total return basis, with net income reinvested.

What are the risks?

  • The value of the fund and any income from it 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 ongoing charges figure 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 fund may invest in other transferable securities, money market instruments, warrants, collective investment schemes and deposits – some of these security types could increase the fund′s volatility and increase the level of indirect charges to which the fund is exposed
  • The fund may invest in overseas securities and be exposed to currencies other than pound sterling – as a result, exchange rate movements may cause the sterling value of investments to decrease or increase
  • The fund may invest in unquoted securities, which may be less liquid and more difficult to value, because they are generally not publicly traded – the lack of an open market may also make it more difficult to establish fair value

Important information

Before investing, you should read the Key Investor Information Document (KIID) for the fund, and the Prospectus which, along with our terms and conditions, can be obtained from the downloads page or from our registered office. If you have a financial adviser, you should seek their advice before investing. Woodford Investment Management Ltd is not authorised to provide investment advice.

The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland. The Fund′s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at www.fundinfo.com.

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

© 2019 Woodford Investment Management Ltd.
All rights reserved.

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