Investor panic following Brexit has led to “hysterical and valuation-insensitive behaviour” prompting a period of rapid portfolio construction activity, according to Neil Woodford, manager of the £8.6bn Woodford Equity Income Fund.
Such “Ill-informed” investor behaviour has led to plummeting valuations including some financial institutions, one of the number of areas with opportunities that Woodford said that he has been happy to restructure his portfolio to take advantage of.
In his latest market view, Woodford said in a statement to investors that, as has been his position prior to the EU referendum, he continues to be cautious on the outlook for the UK and indeed for the global economy.
From a portfolio positioning perspective, however, he said that “the hysterical and valuation-insensitive behaviour” that greeted the referendum outcome has led to a period of more rapid activity than is normally the case.
As a result he is even more confident that he was previously, that his £8.6bn portfolio is perfectly positioned for long-term growth.
“It’s been a busier month than normal in terms of portfolio activity, as the valuation opportunity set rapidly evolved in the post-Brexit market environment,” said Woodford. “We have been compelled to sell some very attractive assets to take advantage of the indiscriminate selling of several shares. When the fight for capital intensifies in this way, the result is a stronger portfolio.
‘Greater level of conviction’
“With that comes an even greater level of conviction in the long-term returns that the fund can deliver over time.”
He pointed that the fund’s net asset value declined modestly in June, down -1.87% against the FTSE All Share Index 2.82%, but slightly up in the Investment Association’s UK Equity Income sector average of -2.51% , according to Morningstar statistics.
Both of the largest detractors from his portfolio’s performance, he says, were in the financial sector: Legal & General (down more than 30% in the immediate aftermath of the Brexit vote) and Provident Financial (down more than 25%), but despite the drop, Woodford has increased his holdings in both firms.
“As primarily UK-facing businesses, both of these companies have been bracketed with a group of other domestic cyclicals and financials, which a large number of investors have simply wanted to exclude from their portfolios, regardless of valuation or prospects,” he said. “In our view, this is a mistake. We have spoken to the management of Legal & General and Provident Financial since the referendum and have concluded that both businesses remain well-placed to deliver very attractive rates of sustainable dividend growth in the years ahead.
‘Ill-informed investor behaviour’
“As such, we have been keen to take advantage of the ill-informed investor behaviour (essentially, panic!), that is a common characteristic of financial markets in a state of shock. We added to both holdings at highly distressed share price levels.”
A similar phenomenon was evident, albeit to a lesser extent, in the share prices of several other UK-facing businesses that are held in the portfolio, Woodford said.
For example, Babcock International, Capita and NewRiver Retail all suffered indiscriminate share price falls in the immediate aftermath of the referendum result which, he said the company has also exploited by adding to the positions.
“The chart below shows a ridiculously short time period but it is useful in illustrating the extent of the rotation out of domestic cyclical sectors and into areas of the market famed for their dependability and global diversification,” added Woodford.
(Pic: Woodford Funds)
“Of course, our strategy is well-positioned to benefit from at least part of this rotation. The portfolio’s exposure to tobacco stocks made a significantly positive contribution to performance during the month, as did our exposure to major pharmaceutical companies such as AstraZeneca, GlaxoSmithKline, Roche and AbbVie.
“Indeed, such was the extent of the share price appreciation in some of these businesses, that we reduced the portfolio’s exposure to them, driven by the rapidly evolving valuation opportunity set in the market and our desire to exploit the distressed selling that had disturbed share prices elsewhere in the portfolio. “This was particularly the case for Roche and Reynolds American, both of which remain attractive business but they both moved rapidly to all-time highs in sterling terms and have subsequently been substantially reduced.”
The surprise outcome of the EU referendum triggered the much anticipated (and, in Woodford’s view, ultimately inevitable) shock to sterling and sharp falls in stock markets across Europe. But despite the extreme market reaction, he reiterated that he doesn’t think that the vote will change the overall trajectory of the economy.
In the short term, the UK economy may slow a bit more than it otherwise would have done, but policy measures, both explicit (looser monetary and fiscal policy) and implicit (sterling devaluation), should mean recession is avoided, he pointed.
“Both the UK and the world face far greater challenges than Brexit, with ebbing global growth, excessive debt, stagnant productivity, deteriorating demographics across developed economies and continued signs of a troublingly prolonged slowdown in China,” said Woodford.
Click here, to view the last video interview with Neil Woodford and to read his latest monthly statement in full.