With just days to go before the Referendum, Neil explains why Woodford investors won’t see any change in his investment strategy – whatever the outcome.
As the political temperature rises as we approach the Brexit vote on 23 June, with just ten days to go, this seems an appropriate time to remind our investors where we stand on the issue. Of course, given the media and political focus on Brexit it is tempting to keep one’s head down and avoid saying anything controversial. However, I believe that it is important that our investors understand how we are contextualising a ‘remain’ or ‘leave’ vote in our investment strategy for the CF Woodford Equity Income Fund.
As you will know, we commissioned some research several months ago, which helped to inform our view about the likely economic implications of ‘remain’ or ‘leave’. We have spent some time and expended much intellectual effort testing our hypothesis and with only a few days to go to the vote, we stand by our initial conclusions. They were, for the record, that we could not construct a convincing long term economic argument that supported either ‘remain’ or ‘leave’.
To be clear, I am not saying that there wouldn’t be more uncertainty in the short term associated with a ‘leave’ result. Clearly, from a UK and arguably European perspective, such an outcome would be destabilising for investors and for governments across Europe and this would take time to dissipate. Of course the likely coincident fall in sterling (especially against the US dollar) would provide some mitigation but in the short term this uncertainty would weigh on us all.
If this is the case, why then do we stand by our initial conclusions? To answer this question investors need to understand the long-term context of our macroeconomic assumptions.
I have said on many occasions that I am very cautious about the outlook for the UK economy and indeed for Europe and other important economic blocs. I have said for some time that global growth would continue to fade and disappoint consensus (with all the associated implications for corporate profits and cash flows). This realistic caution is a reflection of the complex coalition of linked challenges policymakers face. They are daunting and include, in no particular order: excessive government and consumer debt (excessive corporate debt in China); excess capacity and deflation; rapidly ageing demographics; very weak productivity growth; and a lack of investment.
There are others, such as the unfunded retirement commitments common among Western democracies, inadequate savings, wealth inequality, the rise of political populism, and in my view the challenges posed by the scale of the Chinese credit bubble and the implications of its rapid deflation.
Many of these issues will exert a more profound influence over the UK economy in the long run than will our membership of the European Union. These problems will not be resolved by our membership of the EU nor will they be resolved through leaving it.
In my view, these are the challenges which we must confront if we are to sustain our democracy and deliver the rising living standards that we all expect. Furthermore, these are multi-regional, global problems and their solution requires co-ordinated global policy action, the likes of which we have not really seen since the Bretton Woods Conference and the gathering of delegates from 44 nations in the aftermath of World War II.
So, from a portfolio strategy perspective, I continue to believe that there are many more significant challenges facing the UK economy in the long term than Brexit and it is these issues (and others) which have framed our portfolio selections in the fund. That is why the portfolio strategy will not change on a ‘remain’ or ‘leave’ vote.
One other very important issue, which we have discussed recently with investors on a number of occasions is the global complexion of the equity income fund portfolio. The profits, cash flows and dividends of the constituents of the fund will be influenced more profoundly by wider global and sectoral trends than by the performance of the UK economy. Consequently, whether you agree with me or not, it is important for investors to think about the Brexit vote alongside and in the context of all these other factors, which pre-date the Referendum and will dominate the economic landscape long after the vote has faded from investors’ minds.
In the long run, as I have said, many issues will influence the returns we will be able to deliver to our investors. It is my job to keep an appropriate investment perspective on all of them, to weight them appropriately and focus on what is really important.
Finally, all this begs the question: “If the world is that challenging why are you confident that your fund will deliver the high, single-digit returns per annum over a three- to five- year time horizon?” Our answer is that the portfolio is invested in businesses that we believe will deliver this level of growth despite these significant macro headwinds I have described and equally important, these companies trade on valuations which do not reflect that capability. As such, we remain very confident of delivering very attractive returns to investors over that long term time horizon, regardless of the outcome of the forthcoming referendum.