What is the underlying methodology behind the management of the fund?
We apply a bottom-up approach to investment with a strong focus on fundamentals, valuation and conviction. Individual investment opportunities are assessed on their own individual merits, and significant time and effort is expended to assess and understand a company’s long-term growth prospects, its competitive advantages, the sustainability and dependability of its cashflows, earnings and dividends and of course, its valuation.
There is no top-down element to our investment approach albeit, in acknowledging that no company operates in isolation of the broader economic context, having a comprehensive understanding of the long-term global economic outlook is a critical part of our investment approach. We spend a considerable amount of time, therefore, thinking about, assessing and predicting the likely course of the domestic and global economy and its key drivers.
Our investment approach is absolute return focused, with the preservation of capital being seen as of equal importance to the provision of an attractive return. Although we understand that our performance will be compared in a relative sense to the FTSE All Share Index, that benchmark plays no part in portfolio construction. We are benchmark agnostic insofar as every position in the portfolio will be there on its own merit – we do not hold positions purely to manage relative risk.
How will the fund differ to Neil Woodford’s previous UK Income funds?
The fund’s mandate is purposefully very similar to those that Neil Woodford has historically managed. Neil deploys the same investment approach that has proved so rewarding for his clients throughout his career.
Are there any specific market conditions that particularly benefit the fund’s performance?
Our investment approach has proven that it can deliver long-term outperformance in most market conditions, the exception being a late-stage bull market or highly speculative trading environments. In such conditions, our approach is likely to deliver attractive positive returns but is likely to lag the market. Through the cycle, however, we believe our approach will deliver superior long-term returns.
Which sectors of the UK market are currently looking the most appealing for investment?
We have a realistically cautious view of the global economic outlook. Remarkably, the most attractive valuations available in the UK stock market tend to be attached to the shares of companies best able to deliver dependable growth in this challenging world. Many of these companies operate in non-cyclical industries such as pharmaceuticals, tobacco, telecoms, aerospace & defence, so these sectors dominate the portfolio.
What will be the main challenges facing the fund over the coming year?
We expect a more volatile year for financial markets. Over the last few months, equity markets appear to have become less complacent about the challenges that have been worrying the bond market for some time, namely, a deteriorating economic outlook and fears of deflation across the developed world. This process has further to run, in our view, which poses challenges for the fund and for the asset class more broadly, and leaves us feeling somewhat circumspect about near-term prospects. Nevertheless, the portfolio is appropriately positioned for a challenging future and with sensible investment horizons in mind, we remain very confident about the prospect of delivering attractively positive returns to investors.