The turning tide

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Neil Woodford 6 August 2014 Est. reading: 3 min read

“You only find out who is swimming naked when the tide goes out.”
Warren Buffett, Letter to Berkshire Hathaway Shareholders, February 2002

The last five years have been great for financial assets. UK equities have enjoyed a prolonged bull run, as have equities more generally across the developed world. It isn’t just equities that have risen however; returns across practically any asset class you care to look at have had a terrific run – bonds, real estate, gold, fine art. It has been an unusually broad-based bull market.

Why? It’s a direct result of the unprecedented monetary policy that has been in place since the financial crisis, in my view. Quantitative Easing (QE) was explicitly designed to raise asset prices and, in this, it has succeeded. The policy has helped divert the course of the economies that have pursued it away from what may have become a full-blown depression towards something somewhat less severe. This has, by no means, been a benign economic environment, but not as bad as it could have been.

It is easy to argue that we could have been worse off without QE, but are we any better off? Policymakers had hoped that by increasing asset prices, they could engineer some sort of “trickle-down” effect, whereby increased wealth would lead to increased spending, the creation of jobs, and rising business investment, and that a virtuous cycle would ensue. This hasn’t happened, primarily because the assets that have increased in value are not broadly held by all members of the economy.

The asset-rich have got richer, but the asset-poor have not. An unintended consequence of QE, therefore, has been for the distribution of wealth in the UK to become even more unbalanced.

Policymakers have rightly started to become more concerned about this redistributive side effect of QE, not to mention the risk of inflating asset price bubbles to an increasingly dangerous extent. This explains why we haven’t seen further QE from the Bank of England since the end of 2012, and the US Federal Reserve is now tapering its own QE programme. I expect the Fed to have completely withdrawn its extraordinary liquidity support by the end of this year.

The big question is, what will happen to financial markets without the support of QE? How will markets cope without the drug to which they have become addicted? I don’t know the answer, only time will tell, but I suspect that the gap that has opened up between valuations and fundamentals will start to close.

Over the last five years, the rising tide of QE has lifted all boats. It has been an unusually indiscriminate rally with the individual strengths and operational performance of companies largely being ignored. With the tide now turning, I would expect the market to become more discriminate with fundamentals playing a much more significant role in determining the performance of individual stocks. In other words, over the next five years, I expect to see a stock picker’s market – an environment which ought to favour a fundamental investment approach and a cautious investment strategy.

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

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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