Equity Income Fund update, July 2017

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Mitchell Fraser-Jones 22 August 2017 Est. reading: 3 min read

As regular readers will know, our long-term approach to investment management is encapsulated in a patient capital investment style. We look beyond market volatility and focus on the long-term fundamentals of businesses.

This is always the case but particularly so over the past few weeks with, as many of you will be aware, several of our holdings including AstraZeneca, Provident Financial, AA, Theravance Biopharma, Prothena and Imperial Brands experiencing share price weakness.

Neil’s underlying investment philosophy and strategy are underpinned by the analysis of the fundamentals of the macroeconomy and the individual companies in his investment universe. His investment anchor is to always focus on valuation.

When markets lose sight of valuation discipline, as we believe they have done recently, there is always more risk and more opportunity. We seek to avoid the former and capitalise on the latter. It’s a hypothesis that we continually put to the test, questioning whether the businesses we are invested in are performing as we’d expect from a fundamental point of view, not a share price view.

As Neil said in his blog in July, when AstraZeneca’s phase III Mystic trial in non-small cell lung cancer failed to meet its progression-free survival end-point, our investment case for AstraZeneca is not predicated on the outcome of one trial and that its shares remained very attractive. Consequently, we have taken the opportunity to add some more AstraZeneca shares to the fund’s portfolio in the past few weeks.

Likewise, Provident Financial’s interims results reflected the company’s previous month’s profit warning for its consumer credit operation. We met its management team shortly after the results were announced and we were reassured by its planned strategy to get the company’s consumer-credit operation back on track. Against a backdrop of very negative sentiment, we took the opportunity to add to the fund’s position in the shares. Today, however, the company has announced a further deterioration in trading at its consumer credit division which is clearly another disappointing surprise for the company and for its shareholders. You can read Neil’s latest thoughts on Provident Financial here.

Turning to the tobacco industry, Neil has invested in the sector for more than three decades, during which time the industry has come up against many legal and regulatory challenges – the latest being July’s regulatory changes proposed by the US Food and Drug Administration (FDA). The FDA has proposed a new regulatory ‘roadmap’ to address the issues of addiction. However, we don’t believe this undermines the investment case for Imperial Brands, our one remaining tobacco holding. Indeed, we think that it could ultimately be beneficial for the company as we see this as the beginning of a process to deregulate next-generation products. The company remains a highly cash generative business with a good track record of growing its dividend (by almost 10 per cent per annum over the past five years). The shares, in our opinion, have not looked as attractive as they are currently, for several years.

We remain convinced of the attractions of all the companies we mention earlier and believe that their share prices are sitting way below their fundamental value.

This is not to say that there aren’t challenges ahead. We have been talking about economic and earnings risks for some time and as markets have risen these risks have increased. But we are not bearish. In fact, we are incredibly confident about the long-term outlook for the fund from here. The fund’s strategy, about which we have commented at length recently, remains intact and we believe will deliver very attractive returns as it becomes increasingly clear that the underlying performance of the UK economy is both robust and improving.

LF Woodford Equity Income Fund
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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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