Fading global growth, excessive debt levels, lack of investment and rapidly ageing demographics are among the challenges investors should be focusing on rather than the outcome of the upcoming EU referendum, according to star manager Neil Woodford. 
The financial press and mainstream publications alike have been dominated by the now imminent EU referendum for a number of months now, especially as the ‘leave’ vote appears to have been gaining popularity.
The potential of a Brexit – as shown by a weakened pound – has not only given financial pages a seemingly unlimited source of material, but it has also impacted the market itself with many preferring to de-risk their portfolios ahead of the 23 June vote.
Data from the Investment Association shows, for example, that fixed income and absolute return funds have witnessed significant inflows over recent months while money (generally) continues to flow out of equity portfolios.
Net retail sales in April
Source: The Investment Association
Woodford, who runs the CF Woodford Equity Income fund and Woodford Patient Capital Trust, is renowned for maintaining a defensive portfolio and says the current backdrop merits a strategy which revolves around capital preservation.
However, he says this has little to do with Brexit uncertainty.
“I continue to believe that there are many more significant challenges facing the UK economy in the long term than Brexit and it is these issues (and others) which have framed our portfolio selections in the fund. That is why the portfolio strategy will not change on a ‘remain’ or ‘leave’ vote,” Woodford (pictured) said.
This certainly flies in the face of many market commentators’ views, though, with the consensual argument being that if the UK were to opt out of the EU, the implications for trade and foreign investment would have a significant impact on the economy. This belief has been highlighted by sterling weakness over recent months.
Relative performance of sterling in 2016
Source: FE Analytics
However, the former Invesco Perpetual manager and his team at Woodford Investment Management recently commissioned a report on the impact either a leave or remain vote would have on the UK economy.
According to the analysis, which was conducted by Capital Economics, there isn’t a convincing long-term economic argument that supports either a Brexit or ‘Bremain’. Woodford says this has helped his portfolio construction over recent months along with his longer term outlook for markets and the economy.
It this longer term outlook and the risks associated with it that investors need to concentrate more on than the referendum, he says.
“I have said on many occasions that I am very cautious about the outlook for the UK economy and indeed for Europe and other important economic blocs,” Woodford said.
“I have said for some time that global growth would continue to fade and disappoint consensus (with all the associated implications for corporate profits and cash flows). This realistic caution is a reflection of the complex coalition of linked challenges policymakers face.”
“They are daunting and include, in no particular order: excessive government and consumer debt (excessive corporate debt in China); excess capacity and deflation; rapidly ageing demographics; very weak productivity growth; and a lack of investment.”
Woodford notes that these are all headwinds in themselves, but the major worry revolves around the outlook for China.
Issues surrounding the world’s second largest economy, such as the bursting of its domestic stock market bubble, currency devaluation and slowing growth have meant China has been a perennial source of bad news for financial markets over the past 12 months.
Performance of indices over 1yr
Source: FE Analytics
Though there have been signs of stabilisation in recent months, Woodford says the structural issues surrounding China are of far greater concern to the UK than a potential Brexit.
“There are other [risks], such as the unfunded retirement commitments common among Western democracies, inadequate savings, wealth inequality, the rise of political populism, and in my view the challenges posed by the scale of the Chinese credit bubble and the implications of its rapid deflation,” he said.
“Many of these issues will exert a more profound influence over the UK economy in the long run than will our membership of the European Union. These problems will not be resolved by our membership of the EU nor will they be resolved through leaving it.”
To attempt to mitigate these risks, Woodford has long run globally diversified portfolios.
His £8.7bn CF Woodford Equity Income fund, for example, has 17 per cent outside of FTSE-listed stocks while his largest UK stocks generate a large degree of their earnings from outside the country such as Imperial Tobacco and GlaxoSmithKline.
This sort of positioning has worked well over the longer term and since he launched his new fund this time two years ago, with CF Woodford Equity Income still the best performing IA UK Equity Income sector member with returns of 17.98 per cent.
The FTSE All Share, on the other hand, has lost 1.26 per cent.
Performance of sector versus index since launch
Source: FE Analytics
Woodford added: “Finally, all this begs the question: ‘If the world is that challenging why are you confident that your fund will deliver the high, single-digit returns per annum over a three- to five- year time horizon?’”
“Our answer is that the portfolio is invested in businesses that we believe will deliver this level of growth despite these significant macro headwinds I have described and equally important, these companies trade on valuations which do not reflect that capability.”
“As such, we remain very confident of delivering very attractive returns to investors over that long-term time horizon, regardless of the outcome of the forthcoming referendum.”