Woodford (pictured) has long held significant positions in pharmaceutical giants AstraZeneca and GlaxoSmithKline on his Invesco Perpetual Income and Invesco Perpetual High Income funds.
The sector has had its critics in recent times, and at the turn of the year was considered to be in crisis, with the larger firms struggling to maintain their pipelines of new drugs and resorting to reorganisation and acquisitions to try to reignite their businesses. However, the industry has rebounded strongly this year, and is currently up 25.6 per cent compared to 14 per cent for the market as a whole, according to data from FE Analytics.
Performance of indices in 2013
Source: FE Analytics
The results are a vindication for Woodford, who rejected the gloom about a lack of new drugs and maintained large positions in the sector’s leading companies.
He says that the development of “biological” medicines, which allow treatments tailored to specific genetic markers shows how the industry is rejuvenating its research and development output.
“The process was already underway when I started to build a substantial exposure to this sector within the Invesco Perpetual Income and High Income funds, but it was largely ignored and misunderstood by the market,” he said.
“Following a disappointing period of innovation from the industry in which it failed to deliver many new “blockbuster” drugs, returns on investment in the research & development (R&D) of new products had begun to decline.”
“The consensus view of pharmaceuticals businesses at that time was that returns on R&D would remain depressed for the foreseeable future.”
“In other words, the market was no longer prepared to place a value on the “pipeline” – the process of discovering and developing new drugs and future profit streams. R&D became viewed as an expense rather than an investment. The industry had gone “ex-growth”.
“I did not believe this, and saw a profound undervaluation of the sector as a result. I believed that the industry could and would evolve to deliver an improvement in R&D productivity – in fact, several of the largest companies in this sector were already explicitly doing so at that time, but the market was sceptical.”
“The way in which the sector has started to perform this year suggests that the market is beginning to acknowledge that the industry has moved on and that the long-term growth outlook is improving.”
As of 31 July Woodford had made £4.18 on each share of GlaxoSmithKline he bought at £12.66, a return of 33 per cent. This is excluding dividends.
AstraZeneca he bought at £26.08 and made £7.27 on in the same period, for a return of 28 per cent. The manager still has 8.7 per cent of his fund in the former stock and 8.66 per cent in the latter.
Invesco Perpetual Income weightings to sector
| Stock | Book Price (£) | Price at 31 July (£) | Weighting (%) |
|---|---|---|---|
| GlaxoSmithKline | 12.66 | 16.84 | 8.7 |
| AstraZeneca | 26.08 | 33.35 | 8.66 |
| Roche | 102.49 | 161.82 | 5.82 |
| Sanofi | 51.12 | 70.18 | 2.08 |
| Elan | 6.14 | 10.19 | 1.95 |
| Novartis | 38.07 | 47.26 | 1.73 |
| BTG | 2.24 | 3.8 | 1.1 |
He also has 5.82 per cent in Roche and significant holdings in four other drug companies and says he intends to maintain this large position.
“Recent performance has not closed the valuation anomaly – this is just the start of a much longer process of value discovery, in my opinion,” he said.
“Consequently, I remain significantly invested in the sector and continue to believe that these companies remain significantly undervalued.”
Woodford has a track record of making large contrarian calls that have been proven right after a significant period of time.
He refused to invest in the technology sector in the boom leading up to the dotcom crash and banks prior to the 2007 financial crisis.
This means his funds have gone through periods of relative underperformance, but data from FE Analytics shows that his income and high income funds have averaged returns of 10.35 and 10.07 per cent a year over the past 15, while the FTSE All Share has returned 5.35 per cent a year.
This year has seen them return to form after a poor 2012 in which both were bottom decile performers in the IMA UK Equity Income sector.
In the year to date they are up 20.57 and 20.45 per cent respectively, putting them in the top quartile once more.
Performance of funds versus sector and index in 2013
Source: FE Analytics
This is in contrast to the recent pattern of behaviour for these funds, which has seen them underperform in the rising markets of 2009 and 2010 and outperform in the down markets of 2008 and 2011.
The outperformance of the pharmaceuticals sector has undoubtedly aided them this year.
At £10.36bn and £14.1bn respectively the funds are among the very biggest on the UK market, but they are still open with a minimum initial investment of £500.
Invesco Perpetual Income has ongoing charges of 1.68 per cent and Invesco Perpetual High Income 1.69 per cent. Both have five FE crowns.