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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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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