Stock picking is back

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Mitchell Fraser-Jones 3 July 2014 Est. reading: 2 min read

We have mentioned previously on this blog, that the UK stock market has been difficult to beat over the last five years, as a result of extraordinary monetary policy. QE was designed to lift asset prices and it has done so indiscriminately. The rising tide of QE has lifted all ships. The chart below is a good demonstration of this effect, illustrating that global stock correlations have been at elevated levels since the onset of the financial crisis in 2008.

The chart essentially shows the extent to which global stocks move in tandem. A reading of 0% would indicate that there was no correlation between the movements of individual stocks, whereas a reading of 100% would suggest perfect correlation between stocks – all shares moving in the same direction, all the time.

The average since 1990 is about 12%, suggesting that there is a low but positive correlation between the performance of individual stocks globally. This is intuitive – all companies operate in the global economy and the fortunes of the global economy therefore should explain part of the performance of all shares. But the more dominant influences of performance should be the individual characteristics of specific stocks and the operational performance that companies deliver – in other words, fundamentals matter.

At least, they matter most of the time. The chart above suggests they have mattered much less over the last five years than is usually the case – global stock correlations have been significantly higher than usual, particularly between 2009 and 2012.

In recent months, however, global stock correlations have been falling again and have moved back below average. We welcome this trend and take it as a sign that we are moving back into an investment environment in which successful active stock selection is more appropriately rewarded.

We believe there is a long term opportunity for active stock pickers to benefit as fundamentals reassert themselves as the primary influence of long term share price movements.

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 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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