Local vs Global

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Neil Woodford 12 November 2015 Est. reading: 3 min read

I am sometimes asked whether I feel constrained by having to invest the majority of the portfolios I manage in UK assets. In general, I believe fund managers operate most effectively in an environment where constraints are kept to a minimum but, in this particular instance, I do not mind being compelled to invest the majority of the portfolios in the UK.

First and foremost, the reason for this is that I consider myself to be a UK investor. I have been investing in the UK stock market for the best part of thirty years and I regularly draw on this experience in the context of prevailing market conditions. Whether it’s revisiting old ideas, previously quoted companies coming back to the market or management teams I’ve backed before in new settings, the bank of knowledge on which I can draw is an incredibly valuable resource. Experience counts in this profession.

Secondly, the job of managing a global mandate is very different. The investment universe of the UK stock market is big enough – for a global mandate, the universe is unmanageable, in my view. Filtering and screening techniques are required to bring the investment universe down to a more practical size. I have always been against using this sort of filtering process, because it necessarily relies on quantitative data and can prevent you from becoming aware of investment opportunities which may look extremely attractive on any other measure.

Thirdly, and perhaps most importantly, the UK stock market is by no means a direct reflection of the UK economy. The UK stock market is home to some very large, globally-diversified businesses, some of which barely touch the UK economy at all.

We recently conducted some analysis to calculate the CF Woodford Equity Income Fund’s geographic exposure by the revenues of the underlying companies into which it has invested. This isn’t as easy as it sounds – every company reports geographic revenues in its own way and simplifying all of the variations involved some painstaking analysis and a reasonable amount of assumption. This pie chart is the end result and we believe it is a good indication of the fund’s true geographic spread.

Chart showing the geographic exposure of the Woodford Equity Income Fund. UK is the largest percentage at 41.9%

In terms of stock market listing, well over 80% of the fund’s assets are invested in the UK. On the basis of underlying revenues, however, the figure is broadly half that number. The fund also has a healthy revenue exposure to the US economy, which has of course been performing much better than most other economies in the recent past and we would expect that continue, albeit with potentially a more modest growth rate going forward.

The fund also has a reasonable exposure to Europe and emerging markets, which implies a much greater level of geographic diversification than country of listing would suggest. Growth prospects for these regions may look somewhat less robust but it is important to note that our strategy has intentionally focused on dependable sources of growth, investing in businesses that do not need a buoyant economic environment in order to deliver sustainable long-term growth.

Despite this geographic diversification, the portfolio is actually much more UK-centric than the FTSE All Share index. This is down to our lack of exposure to oils, miners and other major global-facing businesses, which in aggregate account for a substantial part of the UK index, but the vast majority of their revenues are sourced from outside the UK. Estimates of the FTSE All Share index’s UK exposure vary, but most analysts suggest that it lies somewhere between 25-35% by revenue.

In general, the ‘less constraints = more opportunity’ mantra is very important. I will always consider myself as a UK fund manager but equally, I am delighted to have the scope to invest overseas where my knowledge of UK businesses lends itself to an overseas context. For example, tobacco and health care are globally consolidated industries where individual companies can have strong similarities and be exposed to the same broad influences. Hence, we have been able to build greater exposure to these industries by investing in attractive overseas businesses, than a UK-only mandate would have been able. This additional flexibility is welcome and will, I believe, add considerable long-term value.

This article first appeared in Money Marketing on 12 November 2015.

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: 27 Old Gloucester Street, London, WC1N 3AX.

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