5 April 2019
“From time to time, markets become detached from valuation reality and while they are, fund managers like me appear to be incapable of delivering good outcomes. I appreciate that this can be an uncomfortable journey for investors but valuation is the only reliable predictor of long-term investment returns. I remain focused on capturing the opportunity that exists in parts of the market that have been left behind since we voted to leave the EU two and half years ago. The portfolios are populated with profoundly undervalued companies, many that are exposed to the UK economy. Crucially, the portfolios are positioned how I want them to be and are completely focused on a valuation opportunity, the likes of which I haven’t seen for more than 30 years.”
— Neil Woodford
Global equity markets continued to move higher in March, allowing the UK stock market to deliver its biggest quarterly total return in six years. Leadership of the UK stock market was, as has been the case for much of the last three years, dominated by the large, global dollar-earners, such as the oil majors, mining companies and consumer goods companies.
Data from across much of the global economy, has continued to disappoint expectations. The US economy in particular, now appears to be losing momentum, prompting the Federal Reserve (the Fed) to significantly loosen its policy stance. Previously the Fed’s guidance had suggested two more interest rate increases were likely this year, with quantitative tightening (QT – the process by which the Fed reverses years of quantitative easing by reducing the size of its balance sheet, thereby withdrawing dollar liquidity from the financial system) expected to continue throughout the year. Now, the next move in interest rates might be down and the pace of QT will slow from May and will conclude at the end of September.
As a result of the stock market rally so far this year, bond and equity markets are now telling us very different things about the economic outlook. The yield on many long-dated US Treasuries, for example, recently moved below that of shorter-dated bonds. This is known as an “inverted yield curve”, which is often seen as an early warning sign that more troubling economic conditions are on their way. It is hard to reconcile this price behaviour in bond markets with the more buoyant mood in equity markets. We have more sympathy with the view expressed by bond markets currently and are positioned accordingly.
We continue to focus the portfolios where there are more attractive economic fundamentals. The UK is one such place. During March, we saw better-than-expected economic data in many different parts of the UK economy, including industrial production, unemployment, wage growth and retail sales.
WPCT annual report
Today saw the release of the Woodford Patient Capital Trust’s annual report for 2018, which includes Neil’s review of the year.
With so much perceived uncertainty surrounding the UK economy, we want to provide you with the full context on what’s been driving the performance of the funds (and indeed the broader stock market) for the past few years and the opportunities we believe lie ahead.
Month in numbers
Source: Bloomberg, Woodford
Three-month UK employment change – the best level since late 2015
UK retail sales growth in February – consensus expectations were for a -0.4% contraction
Price per share that Biogen is paying to acquire Nightstar Therapeutics – a 72% premium to its undisturbed share price
Prior to March’s yield curve inversion, the last time the US three-month interest rate was higher than the 10-year rate – shortly before the financial crisis
Year-on-year decline in the dollar value of China exports
German industrial production down in January, versus expectations of a +0.5% increase
Amount committed by Burford Capital to new investments over the last two years – more than twice the total amount it had committed in the previous seven years since formation
Average growth in UK weekly earnings data in January, ahead of expectations (3.2%)
US housing starts in February, well below expectations – January revised down too
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.