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Neil Woodford - Year to Date Round-up

Neil Woodford has outlined normalising valuations and improving fundamentals in the UK as two themes he expects to unfold this year, benefiting his underperforming funds which he says are "appropriately positioned" to take advantage of them.

Commenting in his latest year-to-date roundup, Woodford said he expects the investment backdrop to look "very different to the one that has prevailed for the last two years", outlining a number of changes he anticipates will take place over the course of 2018.

He also said he is confident that his funds - the flagship £7bn Woodford Equity Income fund, the £675m Income Focus fund and the £625m Patient Capital trust - are positioned appropriately to respond to these changes.

The manager has been under pressure in recent years as his funds have fallen behind their peers and benchmarks. Over three years to 2 March, the Equity Income fund has returned just 1%, underperforming both the IA UK Equity Income sector average return of 15% and the FTSE All Share benchmark's return of 17% during the same period, according to FE.

Meanwhile, the share price of the Patient Capital trust has fallen to a record low as investors have become frustrated with the performance and sold their holdings. The NAV of the fund, which launched in April 2015, has fallen 10% over one year and 13% over six months.

Woodford said the bubble-like characteristics currently present in financial markets "add considerable risk to the investment backdrop" and the elastic between the valuations of popular stocks, such as US internet companies, and unpopular stocks, such as those in the healthcare sector, has reached a "breaking point".

He said:

"We believe this will reverse in 2018, partly as a result of the macroeconomic conditions, but also because fundamentals always eventually have a gravitational effect, which pulls share prices into closer alignment with reality.

"Timing this outcome, or pinpointing a specific event that will trigger it, is not possible but neither is it necessary. It is an inevitable consequence of the way that financial markets work and have always worked - fundamentals matter in the long run."

Woodford added his funds are positioned to exploit the opportunity that will arise when this bubble bursts, as it is invested in domestically-focused stocks which have become "profoundly unloved and undervalued".

He said:

"It is a simple mantra but all we are trying to do is avoid the risk and capture the opportunity. This leaves us confident of delivering attractive and positive long-term returns, even when the market corrects, an event which we now view as inevitable."

Woodford view on the UK - An improving economy

Neil Woodford said:

"We see UK economic health improving, with more people in work, more wage growth, less inflation, more investment spending, better public finances and a continued recovery in manufacturing and exports."

Woodford unveils Income Focus portfolio and takes advantage of 'attractive domestic opportunity'.

"We expect the UK economy to grow by around 2% this year - a considerably better outcome than the recession that some of the more pessimistic commentators are forecasting and what appears to be priced in to valuations. It will also compare very favourably with the apparently ‘booming' European economy, which will probably be growing at approximately the same rate."

In relation to his portfolios, the manager said his exposure to companies that are UK-focused such as housebuilders, construction businesses and retailers will bode well, as he feels valuations and growth expectations are "far too low".

Neil Woodford has outlined normalising valuations and improving fundamentals in the UK as two themes he expects to unfold this year, benefiting his underperforming funds which are "appropriately positioned" to take advantage of them.

Global views

In addition to these expectant trends, Woodford believes tightening liquidity conditions across the globe and slowing growth in China is also taking fruition and could benefit his funds. He described dollar liquidity as the "grease in the wheels of the global financial system" and warned that when it tightens, global trade, commodity prices and equity markets are at risk.

Neil Woodford said:

"We believe that liquidity conditions in the global financial system have already started to tighten and that this is likely to gather pace as the year unfolds,

"The primary reason for this is that central banks, led by the US Federal Reserve, are now tightening policy. If the Fed's dot plots are to be believed, we should expect three 0.25% interest rate increases in 2018, alongside quantitative tightening at an accelerating rate, as the world's biggest central bank progressively unwinds the biggest monetary policy experiment the world has ever seen."

Woodford said his funds can deter any shocks this may cause as his "non-consensual strategy has actively avoided areas of the market that look most vulnerable to this in the months and years ahead". Instead the manager focuses on stocks that have not benefited from abundant liquidity.

Meanwhile, the manager said comments from China's central bank governor and the Communist Party of China's Xi Xinping suggest a slowdown in growth in China.

He said:

"The priorities of the Chinese authorities going forward will be profoundly different to the 'growth at all costs' mantra of the last decade while Chinese authorities are no longer prepared to ignore the economic risks that have accompanied several years of unbridled credit expansion.

"The economic implications of this are not positive for China in the near-term, nor for the rest of the world. Already, we have seen indications of a slowdown in China's economic data, with disappointing trade data in late January and the lowest level of money supply growth since records began in 1996."

Woodford said progressively slower growth from China will take place as the year unfolds and the country "faces up to its massive bad debt problem".

However he is confident that his portfolios will be protected as they have actively avoided exposure to parts of the market vulnerable to this, such as commodities.

These are the views of Neil Woodford, Head of Investment at Woodford Investment Management Ltd and not necessarily those of Elson Associates plc.

- uploaded - 9 March 2018

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Elson Associates does not offer advice as to the suitability of investments. If you are unsure whether an investment is suitable for you, you should obtain expert advice. Past performance of an investment is not necessarily a guide to its performance in the future. The value of investments or income from them may go down as well as up. You may not necessarily get back the amount you invested.

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