Investors in the highly popular CF Woodford Equity Income fund and Woodford Patient Capital Trust took a sharp hit from big bets in biotech during the recent sell-off, according to Mitchell Fraser-Jones, a spokesman for Neil Woodford’s two vehicles.
However, any worries of a bursting bubble in biotech proved unfounded with Woodford buying into the market weakness and the two vehicles bouncing back ahead of the market.
Global markets have been generally weak for the past four months or so, with August particularly unconstructive for risk assets. Woodford’s fund and trust both took a turn for the worst as worries over China exacerbated in the month and while some recovery has been made, they are both down since their August high.
Performance of fund, trust and index since 6 August 2015
Source: FE Analytics
Fraser-Jones says that due to concerns about longer term productivity, deflation, debt and the overall global growth outlook, the team constructed their strategy “on the expectation that it will receive little help from macroeconomic trends” but both vehicles were still negatively affected by a bearish market environment.
There were some notable casualties in both portfolios – mainly in the biotechnology sector in the trust as well as Woodford’s most favoured part of the market, large cap defensives in tobacco and pharmaceuticals in the open-ended fund.
The investment trust’s US biotech holdings were hit particularly hard with the largest detractor to performance being the NASDAQ-listed Northwest Biotherapeutics, following rumours that the clinical trial of an oncology treatment would be halted by the firm. However, the firm had stopped the screening process for new patients but the actual trial is ongoing.
Fraser-Jones said: “The company has confirmed that the suspension related simply to the recruitment of new patients and was a temporary measure while regulatory information was submitted, in line with clinical protocols.”
“The trial is continuing and we see nothing untoward in this development. Alkermes and Prothena sold off heavily too – again, we have no fundamental grounds for concern and were able to take advantage of the share price weakness,” he added.
In Woodford Patient Capital, biotech firms Alkermes and Prothena are the largest two holdings, which alongside Northwest Biotherapeutics make up about 13.3 per cent of the portfolio.
Biotechnology/healthcare is a prevailing theme in the portfolio with the nine largest holdings, making a collective 33 per cent of the portfolio, all in the space and more than half of the 50 firms that make up the full portfolio sitting in the sector.
Fraser-Jones said the team did increase biotech holdings in both the fund and trust, including significantly adding to a position British clinical-stage stem cell business ReNeuron in the trust and introducing two new US healthcare positions to the portfolio in the form of AbbVie and Theravance Biopharma in the open-ended fund.
“ReNeuron has ongoing trials in potential therapies for stroke disability, blindness-causing disease retinitis pigmentosa, and critical limb ischaemia. This new funding round provides the company with the financial resources to drive these programmes through to market authorisation,” he said.
“AbbVie trades on one of the most attractive valuations in its sector despite also offering one of the fastest anticipated growth rates. This is in part explained by fears about the future of Humira, AbbVie’s treatment for auto-immune conditions such as rheumatoid arthritis, Crohn’s disease and ulcerative colitis.”
“Humira is the biggest selling drug in the world and continues to grow quickly but is due to come off patent soon. Theravance Biopharma, meanwhile, is an earlier stage biotech business with one on-market drug (a new antibiotic for difficult-to-treat infections) and a very exciting clinical pipeline.”
The CF Woodford Equity Income fund also has plenty of healthcare. However, the three stocks mentioned and biotech in general are much smaller positions.
The largest detractors during the weak month for the open-ended fund were the likes of British American Tobacco, Imperial Tobacco, AstraZeneca and GlaxoSmithKline. These stocks are its largest four holdings, making up 28 per cent of the portfolio.
“In a panic-driven sell-off such as that which we saw in August, it’s often the largest and most liquid stocks that get hit hardest first. We have seen no fundamental justification for the share price declines and we added to each of these holdings, and several others, during the market turmoil,” Fraser-Jones said.
According to FE Analytics the trust has returned 14.6 per cent since it launched in April while the IT UK All Companies sector returned 2.99 per cent and the FTSE All Share index fell 10.27 per cent.
Performance of trust, sector and index since 20 April 2015
Source: FE Analytics
CF Woodford Equity Income is still top of the IA UK Equity Income sector since launch last year with a return of 20.16 per cent.
Performance of fund, sector and index since launch
Source: FE Analytics
Mark Dampier, head of research at Hargreaves Lansdown, told FE Trustnet he was looking to increase his own personal holdings in Woodford’s (pictured) open-ended fund during the weakness.
Woodford Patient Capital has a fee structure that takes no base fee but applies a performance fee of 15 per cent of net asset value and returns in excess of 10 per year, subject to a high watermark and paid in shares.
CF Woodford UK Equity Income yields 4 per cent and its clean ongoing charges figure (OCF) is 0.75 per cent.