Why focus on the long term?

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Mitchell Fraser-Jones 7 August 2015 Est. reading: 2 min read

Home > Words > Blog > Why focus on the long term?

One of the defining features of our investment approach is our long-term view. We make investment decisions and set our investment strategy on a 3-5 year view but, often, we invest in companies for much longer than that.

Turnover in the CF Woodford Equity Income Fund in the year to 30 June 2015, for example, was 16.0% 1 which implies an average holding period of over six years.

The chart below is a great illustration of why it is important to think long-term about equity investing. Essentially, this chart is showing the historic probability of gain from the UK stock market 2 over different time periods, using data stretching back to 1965. If you had invested for 1 day, the data suggests you had a 55.2% probability of making a positive return. In effect, you might as well have been tossing a coin!

Chart showing the probability of a gain (total return) against the holding period

As the holding period lengthens, however, the probability of gain slowly improves. Over 1 month, the probability of a gain improves to over 60%. On a 3-5 year view, the odds are very much in favour of a positive return and, over 10 years, the probability of a gain improves to very close to 100% (indeed, the recent financial crisis spoilt a hitherto unblemished record for the UK stock market on a 10 year view!).

So, it is clear that investing over longer time periods should be beneficial to your financial health. The chart may look slightly different in 10 years time, but the trend is unlikely to change dramatically.

And, of course, this analysis is based on the UK equity market as a whole, with no attempt to overlay the potential benefits of active fund management. With an experienced fund manager employing a disciplined and proven investment approach to select the most attractive investment opportunities – and avoid the least attractive – we believe that these probabilities can be enhanced still further.

Time will tell, and past performance is of course no guide to the future, but we have long-term confidence in the UK equity asset class and in our ability to add value.

Important information

Past performance is not a guide to future returns.

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.

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority.

Footnotes

  1. Source: Northern Trust, based on lesser of fund buys & sells divided by average fund size for the period

  2. Source: Datastream using Datastream UK market total return index with net income reinvested

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Conversations

Comments are now closed.

  1. Rachel Whitwell 07 Aug 2015 at 11:21 am

    Just wondering, does the return include dividends or does it just relate to the capital value? Thanks

  2. Rachel Whitwell 07 Aug 2015 at 11:37 am

    Ooops, sorry….. I just noticed footnote 2 states with net income reinvested!

  3. Of more interest would be the same chart showing the probability of making a real terms gain, i.e. a gain greater than RPI inflation over the investment period. I suspect this will reduce the probability quite a lot. Or perhaps the same chart using quarterly rests – i.e. 1 quarter, 2 quarters, 3 quarters etc. Where would the big jumps in probability occur in such a graph?

  4. vincent collins 07 Aug 2015 at 12:20 pm

    great article

    I truly agree…
    long term is the safest and best way to invest
    if you invest 100 a month for 40 years
    and you get 12 percent average gain a year
    you will have a million pound plus portfolio…

    perfect for a 20 year old starting out
    for their retirement…

    so long term is the key
    hardest part is finding a good company…

    all the best to the long term investors
    and the great team at…

    woodford investment managers

  5. “Important information- Past performance is not a guide to future returns”

    Of course it *is* a guide (but not guarantee) to future performance or else most people would not blindly invest in the first place!

  6. Neil – I am interested to know if you are looking at investing in Pharmaceuticals & Biotechnology companies like Tiziana Life, who have recently licensed new anti-cancer stem cell technology?

  7. A strong argument for getting a tracker rather than paying millionaires to gamble with your savings. Cheers.

  8. I’m very unhappy to see the fund investing 1.72% in Industrial Heat, a “cold fusion” specialist. I wonder what due diligence was done given the widespread scepticism about this technology which would appear to violate all the known laws of Physics.
    I am led to question the diligence applied to the other investments. I’ll be pleasantly amazed if this company is still in the portfolio in six years.

    1. Paul FarrowModerator 18 Aug 2015 at 9:19 pm

      Hi John,

      Many thanks for your comment and we’d like to reassure you that we do follow a thorough due diligence process for all our investments, irrespective of their size or the fund they are invested in.
      With regard to Industrial Heat, we were, and have been, very aware of the scepticism about this technology. We have undertaken a rigorous due diligence process that has taken two and half years. The company is currently working with numerous scientists and is acquiring both the technology and teams required to maximise the potential of this, and other, new energy technologies.

      The company recently said that it is willing to invest time and resources to see if this technology might be an area of useful research in its quest to eliminate pollution. We share this quest for what we believe will be a significant development and exploitation of new energy sources.

      1. When a reputable peer reviewed academic journal publishes the results of this technology I will be happier. Meantime I believe this will be an embarrassment.

        1. I share John’s scepticism and am appalled to learn that ventures such as this have found their way into the fund. More here: http://www.huffingtonpost.com/david-h-bailey/post_10010_b_8052326.html

          Further digging reveals that the scientist mentioned in the article is a convicted fraudster: http://en.wikipedia.org/wiki/Andrea_Rossi_(entrepreneur)

          While this does not appear to be directly connected to the LENR research, and quite apart from the previously stated doubts about the viability of this “technology”, it does not bode well for the character of the individuals to which our funds are being entrusted in this case.

          This is not an investment, it is a gamble pure and simple – if I wanted that I’d go to Ladbrokes, not a reputable investment manager. It’s not hard to see why such technological quackery might attract such individuals but as an investor I wouldn’t lend this guy a fiver, nor any company that would be associated with him.

          1. WHen you outsource your investment decision making to a fund manager, they may often do things that you may not entirely agree with – that goes with the territory.

            Having said that, I’m astonished to see WPCT investing in this as it would appear to badly fail the “smell test”…

          2. AlainCo (@alain_co) 29 Sep 2015 at 9:59 pm

            Be careful to diversify your sources of information. The Wikipedia pages you have referred to are controlled by a handful of biased editors who have blocked corrections. They blocked updates on Elforsk, peer reviewed paper references and errors in the key Caltech and MIT articles. Like in investment, it is best not to have a single source.

            Rossi was cleared of fraud accusation by the Italian justice system. He was convicted of violation of polluting waste storage (raw material input and fuel output), and tax evasion after his business was halted by pursuit.

            By the way, it is worth noting that Airbus Innovation, represented by their Executive Chief Scientist is supporting the creation of an entrepreneurial ecosystem for LENR. I was in Milan to hear him, with a colleague of Airbus Defense and Aerospace who filed a patent for LENR reactor control. Other major institutions such as Tohoku University, Mitsubishi, Elforsk and the Indian Academy of Science, are also involved in LENR research.

            There is much information available for the those who are prepared to look for it – much more than what I have said here.

            The move by Woodford is interesting even if tiny in the context of the opportunity.

          3. Dig a little farther, Mike P. Unless you are perfectly happy with the justice meted out by the Italian state.

        2. Every paradigm busting discovery is considered suspect. No paradigm busting discovery is appreciated by “reputable peer reviewed academic journal”s. By the time you get your article in a “reputable peer reviewed academic journal”, the party will be over and you will have missed the discovery of the millennium. Rossi deliberately does not care what the academic elites think.

      2. AlainCo (@alain_co) 29 Sep 2015 at 10:03 pm

        Can you publish some results of your due diligence on Industrial Heat?

        1. Hi Alain,
          It would be inappropriate for us to share our due diligence, but please be reassured that this investment is the result of a long and rigorous process.
          Kind regards
          Mitch

          1. I have been doing almost 4 years of due diligence, and I find the claims to be completely credible.

          2. @Mitchell Fraser-Jones
            @Paul Farrow

            Perhaps you could explain why it is inappropriate to share, at least in general terms, your two and half year process of due diligence.

          3. @Mary Yugo: We are keen on transparency and already disclose significantly more than our peers. We draw the line at revealing our proprietary research and due diligence on any stock we invest in, however.

          4. Is there any chance you are going to create a fund that focuses on LENR in the near future, or this is the only vehicle you will use to invest in it?

          5. Christian Schumacher 01 Oct 2015 at 9:05 am

            Swedish and Italian academics have published a paper on the e-cat technology (claimed 3rd party independent review). However, meanwhile it has been revealed that the evaluation of excess energy was wrong (Clarke). So, it makes us wonder what kind of research your “experts” have done to establish the validity of the concept.

          6. @MITCHELL FRASER-JONES

            I understand that you can’t share every aspect of diligence for every investment. But this is a unique situation for two reasons. First, the technology is very controversial and most physicists would say it is highly questionable. And second, the principal recipient of the funds, Andrea Rossi, has been accused of extensive criminal activity in the past and his present claims are, in the opinions of many, very poorly tested.

            It would have been reassuring had you said that you arranged for independent tests to have been conducted by a well known and completely reliable testing company, government lab, or university department. It would be good to know that you did not rely on widely discredited tests, conducted by LENR proponents with the active participation of Mr. Rossi. A statement of this sort should not reveal anything proprietary.

            Be that as it may, this is obviously not the right place to discuss Mr. Rossi’s claims. But an interesting and current, open conversation is going on elsewhere, courtesy of Fortune magazine. If anyone wants to know why Mr. Rossi’s reputation and claims are questioned, please check out the web page below, click on COMMENTS, and pay particular attention to comments by Steven Krivit (sbkrivit) and me.

            http://fortune.com/2015/09/27/ceo-cherokee-investment-partners-low-energy-nuclear-reaction/

            For a long term, ongoing, uncensored discussion, go to:

            http://ecatnews.com/?p=2655#comments

            or http://www.moletrap.co.uk/forum/ (requires simple application for free membership)

            Thank you for your courtesy in allowing me to raise these issues.

          7. I would like to recommend http://www.e-catworld.com for a more civilised
            and mature discussion on these matters than the one’s sugested above.

      3. AlainCo (@alain_co) 01 Oct 2015 at 11:40 am

        Just a question on the investment strategy that support this decision.

        Do you consider this investment in this LENR startup
        – as a directional investment in what you expect to be a winning strategy
        – as a hedging position to balance other investment who are correlated negatively with LENR development scenario ?

        Also what is your investment target .
        – Is it to invest in assets that will gain value from LENR development (Financial strategy)
        – is it to own some IP and industrial assets to be able to develop a LENR strategy with the rest of your industrial portfolio (Industrial leverage strategy).

        Best regards.

  9. Bravo for leading the pack in LENR investment. I’d like to add that another one of the best long-term investment opportunities I’ve come across is tropical reforestation (and sustainable agroforestry). ~$200K –> $20M+ in 15-20 years. ie ~35% compound interest. ie fixing the forests of this planet is a massive opportunity. Not sure what kind of passive investment vehicles are currently available for this but there should be movement in this space soon. Wood will be like gold.

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