3 May 2019
“Slower growth is a major challenge for global markets. This has been felt most acutely in Europe, emerging economies and in China and there is evidence that this slowing will continue through 2019. This, in turn, will raise earnings risk against a backdrop of excessive valuation in markets – a potentially dangerous combination. A further headwind as we approach the summer is a significant deterioration in global US dollar liquidity, which may be the catalyst for a much less benign market environment than that which we have witnessed in the first four months of the year. The comfortable consensus view that prevails in equity markets globally is about to be challenged.”
— Neil Woodford
Global equity markets continued to move higher in April, with similar preferences evident to those that have prevailed for much of the last three years. Accordingly, the UK market’s leadership again came principally from Asian-exposed businesses. We continue to see the widespread enthusiasm for the large, global-facing businesses that dominate the UK stock market as fundamentally flawed and increasingly dangerous from the perspective of valuation risk.
The loss of momentum in global economic growth has been widespread and is perhaps best epitomised by what’s happening in China and its local trading partners in Asia. China’s economic problems are well known, and a meaningful slowdown in growth has been evident over the last 18 months. Policy has been loosened slightly in response, and this has been enough to prompt a rapid stock market recovery in China, albeit one that remains highly speculative. Although official economic data seems to have stabilised in recent months, other, less malleable data points provide a better indication of what is really happening. These include domestic car sales, as an indicator of domestic demand, and industrial production and export data in other Asian economies that are dependent on Chinese growth. Here, the numbers remain troubling and it is increasingly difficult to reconcile the behaviour of equity markets with the economic evidence that we continue to see.
In recent months there has been considerable commentary about the shape of the portfolios Neil manages, in particular, the LF Woodford Equity Income Fund. In light of this, Neil explains why the fund is positioned as it is today and what this means for investors in the months ahead.
Month in numbers
Source: Bloomberg, Office for National Statistics, Woodford
German GDP growth forecast for 2019, down from 2.1% a year ago
Latest change in China car sales (year-on-year)
Amount raised by Autolus for to support a new clinical trial in AUTO1, a potential treatment for adult acute lymphotic leukaemia
Latest change in Taiwan industrial production (year-on-year)
Potential value of ReNeuron’s partnership with China-based Fosun Pharma
Halifax house price index increased by a higher-than-expected amount in Q1 2019
UK retail sales rise in March, vs expectations of a -0.3% decline
Increase in UK employment in the three months to February 2019, to a record high level
US GDP growth for Q1 2019, much better-than-expected
Woodford Patient Capital Trust: April’s milestones
Several of the portfolio companies held in Woodford Patient Capital Trust plc (WPCT) reached significant milestones during April. They included Inivata’s valuation uplift and Benevolent AI’s collaboration with AstraZeneca.
Following a positive reimbursement decision in the US for Inivata’s maiden non-invasive blood cancer test and a successful $52.6m fund raising in March, the company’s valuation has this week been revised upwards by Link Fund Solutions Limited, WPCT’s appointed Alternative Investment Fund Manager (AIFM). The value of Inivata has increased by 58% and is valued at £31.2m.
Inivata is a clinical cancer genomics company commercialising its initial blood biopsy test that helps clinicians make more informed treatment decisions for patients with lung cancer based on their blood samples. Its initial test in the US is called InVisionFirst®-Lung and recent data demonstrated that it reveals the same quality of information as tissue-based cancer profiling in a less invasive way. As at the end of March 2019, it represented a 1.91% position in the WPCT portfolio.
Benevolent AI announced a partnership with AstraZeneca to identify new targets in two therapeutic areas of huge unmet need, Idiopathic Pulmonary Fibrosis (IPF) and Chronic Kidney Disease (CKD). The collaboration comes with an undisclosed upfront payment, development milestone payments and tiered royalties on future revenues.
Mene Pangalos, on the executive management team at AstraZenca, said: “By combining AstraZeneca’s disease area expertise and large, diverse datasets with BenevolentAI’s leading AI and machine learning capabilities, we can unlock the potential of this wealth of data to improve our understanding of complex disease biology and identify new targets that could treat debilitating diseases.”
As at the end of March 2019, Benevolent AI represented an 8.33% position in the WPCT portfolio.
On 9 April, ReNeuron announced it had signed an exclusive agreement with Shanghai-based Fosun Pharma to fully fund the development, manufacture and commercialisation of its CTX and hRPC cell therapy programmes in China.
ReNeuron is also developing a therapy (known as hRPC) for blindness-causing disease retinitis pigmentosa. Over the past few weeks, the company has reported an ongoing and clinically meaningful improvement in all patients of the first group of phase II patients receiving the treatment. As at the end of March 2019, it represented a 0.48% position in the WPCT portfolio.
Idex Biometrics entered into an agreement with a major global information and technology company that provides hardware, analytical software, data services, and news to the world’s financial companies. The agreement includes a multi-million dollar commitment for Idex’s SmartFinger® IDX 3200 dual-interface sensors.
The Norwegian technology company was founded in 1996 to pioneer miniaturised fingerprint sensors. The company aims to provide consumers with a secure and user-friendly use of personal identification by developing and commercialising fingerprint imaging, recognition and authentication technology. Last month, Idex also announced that along with China smart card provider, Chutian Dragon, which it has been collaborating with since 2018, it will be working alongside point of sales terminal provider PAX to accelerate biometric smart card adoption in Asia. As at 31 March 2019, it represents a 1.33% position in the WPCT portfolio.
Evofem has entered into a securities purchase agreement to raise up to $80 million through a private placement of common stock from new and existing investors, including a strategic investment from NASDAQ-listed PDL BioPharma (PDL). The financing, at a premium to the current share price, enables Evofem to maximise the opportunity for its contraceptive gel Amphora, which if approved, will be the first hormone-free, woman-controlled birth control method. As at the end of March 2019, it represents a 0.37% position in the WPCT portfolio.
Autolus is at the forefront of a revolutionary immuno-oncology treatment, dubbed the ‘living medicine’, that is offering new hope to patients suffering from blood-related cancers such as lymphoma and myeloma. In April, the company raised $100.8m that will propel the company to a position of strength. It will be able to resource late stage clinical activities for its leukaemia asset Auto1 (which recently reported impressive data in both adult and paediatric patients) and build out a commercially viable manufacturing base. As at the end of March 2019, it represents a 9.33% position in the WPCT portfolio.
The company is developing SABRE with the support of BAE Systems, Rolls-Royce and Boeing. The Sabre air-breathing rocket engine is designed to drive space planes to orbit and take airliners around the world in just a few hours and its propulsion system technology has passed a key milestone in April.
The company’s pre-cooler heat exchanger passed all test objectives in the first phase of high-temperature testing designed to directly replicate supersonic flight conditions. It demonstrated the ability to handle the simulated conditions of flying at more than three times the speed of sound. As at the end of March 2019, it represented a 0.48% position in WPCT.
Key Company Events
Our strategy remains focused on avoiding the considerable risks that have built up in equity markets over the last decade of QE-fuelled exuberance and capturing the opportunity that exists in the few parts of the market that have been left behind. For the funds, this results in portfolios that have a strong but selective bias towards profoundly undervalued companies that are exposed to the UK economy.
Elsewhere, the Woodford Equity Income Fund and Woodford Patient Capital Trust portfolios continue to be positioned to capture an exciting long-term opportunity across a range of earlier-stage businesses exposed to the themes of healthcare innovation and disruptive technology more broadly.