does size matter? - Woodford Investment Management

does size matter? - Woodford Investment Management

DOES SIZE MATTER? Mitchell Fraser-Jones, 17 June 2014 The views expressed in this article are those of the author at the date of publication and not ...

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DOES SIZE MATTER? Mitchell Fraser-Jones, 17 June 2014

The views expressed in this article are those of the author at the date of publication and not necessarily those of Woodford Investment Management Ltd.

Last year saw a significant outperformance of mid caps versus large caps. The chart below shows that the FTSE 250 index outperformed the FTSE 100 index by 14.4% in 2013. Expectations (misplaced, in our view) of a sustained improvement in UK economic conditions drove much of this mid cap outperformance, the FTSE 250 index being much more domestically and cyclically oriented than its large cap counterpart.

But this outperformance also led to an increasing valuation gap between these two parts of the market. In PE terms, the FTSE 100 Index started the year on a forecast multiple of 12.9x earnings, compared to the somewhat more stretched 16.1x for the FTSE 250 Index (source: Bloomberg). 2014, thus far, has shown a very different pattern. Early year mid cap outperformance has petered out, with the FTSE 250 Index currently 6% below its late February highs. This differential was particularly pronounced during the recent spell of slightly more risk averse market sentiment.

DOES SIZE MATTER? Mitchell Fraser-Jones, 17 June 2014

The valuation gap has moderated slightly as a result but valuations generally remain more attractive amongst large caps. Even here, however, it is as important as ever to be selective and vigilant. It’s also important to point out that we are not at all prescriptive about what size of company we will invest in – we will go wherever we find the most attractive investment opportunities, from the largest companies to the very smallest, as Neil’s Insight article last week explained. In this respect, size doesn’t matter at all. What does matter is that we are convinced that a company, regardless of its size, is attractively valued and capable of delivering attractive long-term returns. Nevertheless, it is fair to say that many of the most attractive opportunities that we find in the market today are amongst the large caps. The UK stock market as a whole is broadly flat year-to-date but clearly there’s been a lot happening beneath the bonnet. This isn’t just a UK phenomenon either – US and European markets have shown a similar trend. We wouldn’t be surprised to see continued outperformance of large caps – in particular, attractively-valued, high quality large caps – going forward as fundamentals and valuations reassert themselves.

What are the risks? – The value of the fund and any income from it may go down as well as up, so you may get back less than you invested – Past performance cannot be relied upon as a guide to future performance – The annual management charge is charged to capital, so the income of the fund may be higher but capital growth may be restricted or capital may be eroded – The fund may invest in other transferable securities, money market instruments, warrants, collective investment schemes and deposits – The fund may invest in overseas securities and be exposed to currencies other than pound sterling – The fund may invest in unquoted securities, which may be less liquid and more difficult to realise than publicly traded securities Important information Before investing, you should read the Key Investor Information Document (KIID) for the fund, and the Prospectus which, along with our terms and conditions, can be obtained from the or from our registered office. If you have a financial adviser, you should seek their advice before investing. Woodford Investment Management Ltd is not authorised to provide investment advice.

DOES SIZE MATTER? Mitchell Fraser-Jones, 17 June 2014

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN. Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP. The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland. The Fund’s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at www.fundinfo.com. © 2018 Woodford Investment Management Ltd. All rights reserved.