Balancing act

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Mitchell Fraser-Jones 24 May 2016 Est. reading: 6 min read

All the talk of rebalancing the UK economy that we heard from policymakers in the immediate aftermath of the financial crisis unfortunately, has led to nothing. The UK economy is more unbalanced today than ever before.

We had a recent meeting with Darren Winder of the Lazarus Partnership – Darren has been a very valuable input into our investment process for many years and his extensive knowledge and database on the UK economy is pretty much unsurpassed. We covered a lot of ground during the meeting, but some charts really stood out. Here we provide a few of them, which we believe provide strong evidence of the continued imbalances within the UK economy and the unsustainable nature of recent economic growth.

First, the household savings ratio. UK households are saving less now than ever before – at least as far back as records go, which is the mid-1960s. The average household currently saves less than 4% of its income each year – we are a consumer economy but surely a higher savings rate would be a positive step towards a more balanced economy, capable of delivering long-term prosperity, not least because in a theoretical sense savings should equate to investment? It was widely acknowledged as we emerged from the financial crisis that the UK savings rate was too low – there was considerable talk about the desire for a higher savings rate in order reduce the UK’s vulnerability to shocks in the future. This clearly hasn’t happened.

Graph showing the UK household saving ratio

Second, house prices, which never fully corrected in the aftermath of the financial crisis, have started to rise again and, with incomes barely growing, the valuation of housing is increasingly stretched. We don’t think this is sustainable at all. The chart below shows how the price / income ratio of the UK housing market is now very close to the levels it reached just before the financial crisis and as Sir Isaac Newton famously demonstrated, what goes up must come down eventually.

Graph showing the UK house price to income ratio

Third, the current account deficit is also at an all-time extreme, currently representing approximately 5% of UK GDP. We have a service surplus, but the amount of goods that we import has never been higher! Again, policymakers talked extensively about the need to reduce the UK’s dependence on a few service-based industries and rebuild the economy’s industrial manufacturing and export base. In the real world, this simply hasn’t happened and UK industrial production is now officially back in recession.

Chart showing the UK's current account balance

The UK economy has been stronger than we had expected in recent years and has been growing at a moderate pace relative to global growth. However, this unbalanced progress, if we can call it as such, has been driven by unsustainable forces and an excessive reliance on consumption. Usually, if an economy becomes as unbalanced as this, something has to give.

Consequently, we now expect a weaker outlook for the UK economy – not necessarily a recession but a period of slower growth. This view isn’t dependent on the outcome of the referendum – we continue to believe that the economic implications of Brexit would be largely irrelevant in a longer-term context, as previously argued.

As such, the portfolios are positioned with weaker domestic growth in mind. Our investment strategy is driven by a global perspective rather than a local one. Many of the companies we have invested in have little or nothing to do with the slings and arrows of the UK economy. Meanwhile, the fate of our early-stage businesses will be determined by the progress they make towards commercialisation, rather than their exposure to the economic cycle. With the portfolio positioned in this way, we remain confident about future returns, in spite of the UK’s economic headwinds.

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

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.

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