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.
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Do I detect a marked reluctance to make a comment re the effects of an either IN or OUT vote, and why should that be. I would have thought one so highly regarded in the realms of finance and investment would wish to add his views on whether it is better for the UK economy to be in or out and which would be better for the Funds?
If you read the article properly you will see the answer is clearly provided.
I agree. The elephant keeps walking as the dogs keep barking.
The first sensible analysis I’ve read concerning the Brexit debate. Thank you.
Clarity of thought and argument as always. Cuts through the nonsense spouted on the economy by both sides of the debate.
I would have much preferred the Government to have spent their ‘marketing budget’ on circulating this to every household rather than the guff they did send!
Should be compulsory reading before anyone is allowed to vote.
Everyone in Britain knows that Brexit has one issue on the agenda which is Immigration. The Toffs that lead the Leave campaign don’t like to mention the 300 mile land border with the UK that cannot be policed and the instability that will be created in Ireland. Are they going to build a Wall like Trump to keep out the Refugees and Migrants? The economic arguments to stay in the EU are compelling for the UK but that does not matter to those who have another agenda within the Tories.
That’s simply not true Ray.
Both sides of the debate have several issues on their agenda.
Ireland is not part of Schengen and has its own border controls, including the need to show your passport even if you are coming from the EU, so ‘Refugees and Migrants’ don’t have unimpeded access to Ireland and thus policing the land border with the UK wouldn’t particularly need to change if the UK left the EU.
ENJOYED THE READ NEIL AND IVE VOTED OUT AND IM SURE YOU WILL CONTINUE YOUR GOOD WORK IN MAKING OUR INVESTMENTS MAKE THE MONEY WE EXPECT WITH YOU AND YOUR TEAM LOOKING AFTER OUR MONEY
THANKYOU AGAIN A SATISFIED INVESTER
B C
Sound reasoning Neil. I think it likely the EU will implode at some point. It is cracking at the seams now and the admission of yet more developing nations seeking membership will heighten its problems. It has been an unsuccessful political , financial and social experiment that has run its course.
To construct the Fund with wider and more important global factors in mind must be the correct approach.
Its refreshing to have a commentary that does not attempt to “strongarm” the reader into either remain or leave but instead focuses on the job in hand namely the management and future performance of the investment fund which clearly through its investments has to look far beyond Europe. If anyone wants to know how NW stands personally then probably the easiest way is to ask him , not as an investment manager but more as an individual .
We should already know his personal stands.
I agree that it is sensible to construct a portfolio which is not too sensitive to the economy background; but the problem whether the result of the referendum has long lasting effects on the economy is entirely different.
The remain group have not won the argument on the economy. Neil sees that the UK can prosper outside or inside. Cameron has tried to scare every section of society into voting remain. His latest attempt to terrify pensioners is despicable. Cameron has morphed into Blair2. Oh the irony of the name of the offshore fund his Dad used – Blairmore! His legacy will be to be classified alongside Chamberlain. Appeasement never achieved anything.
In Neil we trust – for politicians only contempt!
This is why I am more than happy to invest in the Woodford fund. Fantastic article Neil. I really appreciate this blog.
I do hope that all those clamouring for Brexit can assure the rest of us they will be able to conclude all the necessary trade deals in double quick time so that any negative impact on sterling and the markets is as short lived as possible? You won’t but do not have the objectivity to say so. When Neil was at Invesco if you had invested £100 in his Income fund on 1 Jan 2008 it would have been worth £98.68 by 31 Dec 2010 and £105.76 by 31 Dec 2011 which allowing even for low inflation in those years still meant you were losing. For the record the unit price fell by 19.91% in 2008 and went up by 10.51, 11.49 and 7.18% in the following 3 years. The financial crisis was bad enough but in a way we were all affected by it. We are now wanting to move away from a whole business framework and start a brand new one and apparently it is a walk in the park? There is one factor that is undeniable: none of the key personalities supporting and promoting Brexit will suffer any financial hardship should this prove to be not quite as good a move as was wished. Mr and Mrs Averaged on the other hand will be at sea without a paddle and however a fan of Neil I may be and promoter of his fund, if the markets do a 2008 type repeat, whatever his strategy is, the one thing he is not is a magician and he did not beat gravity back then and will not beat gravity this time around. In the meantime investors in his and other funds will worry about their finances. He will not.
Spot on, mate. I’m quite surprised Neil didn’t come out on the more rational side of this debate. I’m still backing him but I reckon the team is underestimating the overwhelming downside-risk on Brexit. Here’s to hoping Neil has privileged access to (future) reality which I lack! 🙂
The U.K. will easily arrange a trade agreement with th EU. They sell us £60 billion more than we sell them! Angela Merkel will not go to the German car makers and say we won’t do a deal with the U.K. Neither will France.
Nothing changes for 2 years anyway which will give the markets time to adjust. The £ dropping will be good for exports and might even cover the rise in import tariffs if they ever apply.
Inflation cannot rise in the current climate. We can buy cheaper food from the rest if the world – oh for New Zealand butter and lamb!
Government is borrowing at record low rates.
With regards to the real issue we will regain the right to govern ourselves and can tell the European court of human rights to go forth and multiply. He already have the worlds best justice system and don’t need them to overrule us at will.
We can keep our own money. We give £350m a week and what we get back is controlled by Europe. If I asked you to give me £350 and I say I will give you a chunk back but I will also tell you how you will spend it you would agree that you have lost control of £350!
The USA gets by with only one President (a useless one at that!) but the EU has five! Each one is unknown to the entire UK population as are most of the Euro MEPs.
The French government will defend the CAP (common agricultural policy) forever despite the fact that it eats up 70% of the EU budget and exports farming poverty to the third world who are least able to cope.
The EU budget has not been signed off by auditors for over 25 years. Would you invest in a company with such a track record? I think not.
Notice I haven’t even touched upon Immigration. That’s another whole story of mismanagement by the ruling elite who are determined to eliminate the nation state in favour of a melting pot of a border less super state regardless of the cost to social cohesion.
To all those who seem to care more about their own personal wealth than any other issue I say why be so selfish. Because the market is selfishly worried only about their market returns my portfolio is at least £20k down over recent weeks. I’m not worried about it. The issue is of far greater importance and I’m certain that given time to adjust the stock market will easily rebound.
Oh did I mention that the likes of Blair and Brown the architects of financial and socio-political disaster favour staying in the EU! Gordon should be asked to explain why he sold the county’s gold when the price was at an all time low costing the nation £12 billion and why he decided to destroy the best occupational pension system in the world. Meanwhile Tony should concentrate on what he is going to say about the Chillcot inquiry, then again he has glad 7 years to prepare his answer as a ‘straight sort of guy’.
Why wouldn’t remain EU country’s say ‘ Britain has left- for the opportunity to trade in the EU you have to have an EU head office..
Many global companies have their businesses here to trade within EU
and will therefore over time shift there.
JP Morgan says 5,000 job losses will have to move its European operations which are now in UK to EU
Once out we are out permanently, they will just say goodbye and look
After THEIR interests not ours.
At the moment many (most?) global entities have their European hq’s
In uk..
Frankfurt and the French are rubbing their hands at the prospect.
In a world where everybody seems to be entrenching and putting up barriers they will all be fighting for ours.
Bibi jobs – bibi tax revenues bibi money to spend on …
Sometimes it only takes one thing to destroy ..so short memories and knowledge
Recently,
Arab Spring
Syria
Libya
Egypt
History is littered with examples .
Remember this is not about our future but our children’s children future
This is a great article, and typical of the excellent standard of analysis we have come to enjoy from the Woodford stable.
I have to say though when seeing the current economic challenges listed – excessive government and consumer debt (excessive corporate debt in China); excess capacity and deflation; rapidly ageing demographics; very weak productivity growth; a lack of investment, unfunded retirement commitments, inadequate savings, wealth inequality, the rise of political populism, and the rapid deflation of the Chinese credit bubble – it makes me wonder whether there is any place for equities in this environment and whether we should all just buy gold!
There are always problems. 2014/15 and 16 up to a couple or so weeks ago were hardly periods of sinecure. Yet I did an exercise for clients who had invested in both Neil’s Income and Invesco’s Income funds. Both had given a yield of 6.6% over that period against the original amount invested. Neil had also generated over 7% capital growth. Not today!!! If you’d invested directly into UK builders you’d made even more including a nice capital appreciation. And we want to potentially throw it all away. Builders and banks in particular are being savaged right now. Gold may not help because after a potential initial global contagion, Asia and America may be laughing and if so gold will retreat. If a contagion goes global and last then you are right with your call on gold. And what will have triggered such a move. Brexit. Oh well done it must have been worth it for their leaders but as Nigel did say “a price worth paying” which of course he is not.
This is an intellectually lazy analysis. Of course Brexit could (last word underlined) make a fundamental difference. I can think of at least ten equally plausible scenarios that could happen if we leave, with very different outcomes for the economy.
The problem with economic forecasters is that they put far too much weight on economic/commercial arguments and pay scarce attention to political factors. The Brexiteers, for instance, blindly argue that post Brexit, companies as important as BMW, Mercedes, will ensure that Britain rapidly secures access to the European market. With passionately pro EU leaders, in key European countries, like Merkel and Hollande, fearful (rightly) that Brexit will encourage their own exiteers, does Neil honestly believe that Germany and France will give us an easy ride ( and this does not even start to take account of the innate French dislike of the British)? Then, does he think, post Brexit, that Britain will have the same degree of influence in the world at large? Then again, what will be the impact of Brexit on the EU? Will it expedite its break up? Will it lead to fundamental reform? All my European contacts ( and I have been intimately involved with international politics for fifty years) assure me there are a number of possibilities. Again, what if Donald Trump with his isolationist agenda, becomes President? Russia, in the event of Brexit, will be delighted….but how will Putin act? There are a huge number of imponderables if Brexit prevails and a sophisticated forecaster should consider them all.
I am afraid I am starting to lose confidence in Neil. My family and I have quite large holdings in his two funds but I am considering downsizing.
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Peter I agree with your comments. I found the original economic report very light on content. It ignored whole chunks of the economy – agriculture, food and drink. This is more of the same. For example, the Funds have exposure to pharma/health companies but in a Brexit the European Medicines Agency (EMA) leaves London and with it Regulatory access to the EU and EEA area after 2 years. After Brexit access will have to be negotiated separately for new Human and Animal Drugs. I cannot see the EU being in any hurry to agree Regulatory agreement on UK Drugs. This type of situation is replicated all over the place and the UK will be the loser. Time is money in business or even worse no business.
I don’t consider myself an expert, but my experience has been that if one has chosen shares wisely then the best way of dealing with volatility is to sit tight and let things take their course. Ultimately the good shares will hold their value in proportion to their dividends and prospects for growth. It seems that the article is propounding much the same view and I find it reassuring.
It’s a good multi-factor analysis regards the political, economic, social (and environmental) challenges across the world that are connected in many ways, not least through rampant capitalism that has failed to deliver sustainable and well distributed growth. However, it misses the subtly of the intention behind leave or stay which will swing the mood of the nation one way or the other and the mistake is to analyse it is a rational choice. In times when all countries need closer co-operation to deal with global problems leave is a big mistake.
I was given to understand that because of the nature of the holdings in patient the price would not rise and fall in line with the stock market
Well it sure as hell fell in line with it over the last few days but the recovery doesn’t ever seem to be as good
Hi David,
Thanks for your comment. I think you’re referring to the share price movement of the Woodford Patient Capital Trust which has declined in recent days, in response to the volatile market conditions that we are currently seeing. The net asset value (NAV) performance of the trust has been much steadier during this period, as you might expect, given that almost half of the portfolio is in unquoted securities.
As you will know, movements in the share price of an investment trust are influenced by the normal forces of supply and demand for the shares and, although an investment trust’s share price will track its NAV, the two will rarely be exactly the same. The Woodford Patient Capital Trust has tended to trade at a premium to NAV since its launch but in recent days that premium has diminished. There is nothing fundamental behind this move, rather, we suspect that it reflects a reduced appetite for UK asset exposure in the run-up to next week’s EU referendum.
Although we understand and share your frustration in the near-term, please remember the long-term nature of this investment strategy. We have invested in some incredible businesses with massively disruptive technologies and high growth potential. Some of these businesses may take a long time to fulfil their potential but the stock market is not well endowed with patience, particularly in volatile conditions. Therein lies the opportunity for patient capital to exploit. It will be the fundamental progress made by these companies on their long journey towards commercialisation that determines the long-term performance of the trust and, as such, we remain confident that the portfolio is well-placed to deliver very attractive long-term returns.
Kind regards,
Mitch
Thank you Neil. At last a balanced argument that I can understand and helps clear my Indecisions. So I am out of Europe and still in with Woodford!
Thought it worth sharing this comment, which I solicited from the esteemed US economist blogger Scott Grannis:
“Re: Brexit. I am certainly not an expert on the potential ramifications of a Brexit, nor on British politics, so my opinion on this issue is of little value. But as a supply-sider, I think that eliminating layers of government (i.e., all the burdens of the European Union) and regaining some sovereignty (e.g., restricting immigration to some extent) could lead to an improvement in “animal spirits,” which in turn would be good for growth in the long run. As for international trade, I find it hard to believe that things would shut down, since the UK is a very important trade partner within the EU.
The best thing the UK could do upon exiting the EU and its treaty obligations would be to do nothing: simply open itself to all international trade. Who needs treaties, when the country that most benefits from trade is the one that restricts it the least? The best solution for a Brexit is the easiest.”