I am sometimes asked whether I feel constrained by having to invest the majority of the portfolios I manage in UK assets. In general, I believe fund managers operate most effectively in an environment where constraints are kept to a minimum but, in this particular instance, I do not mind being compelled to invest predominantly in the UK.
First and foremost, I consider myself to be a UK investor. I have been investing in the UK stockmarket for the best part of 30 years and regularly draw on this experience in the context of prevailing market conditions. Experience counts in this profession.
The second reason I am happy to focus on the UK is that the job of managing a global mandate is very different. The investment universe of the UK stockmarket is big enough in my opinion. A global mandate requires filtering and screening techniques to bring the universe down to a more practical size. Personally, I have never wanted to use such a filtering process because it relies on quantitative data, which may prevent me from becoming aware of investment opportunities that look attractive on any other measure.
But third, and perhaps most importantly, the UK stockmarket is by no means a direct reflection of the UK economy. It is home to some very large, globally diversified businesses, some of which barely touch the UK economy at all.
We recently conducted some analysis to calculate the CF Woodford Equity Income fund’s geographic exposure by the revenues of the underlying companies into which it is invested. This is not as easy as it sounds: every company reports geographic revenues in its own way and simplifying all of the variations involved some painstaking analysis and a reasonable amount of assumption. This pie chart below is the end result.
In terms of stockmarket listing, well over 80 per cent of the fund’s assets are invested in the UK. On the basis of underlying revenues, however, the figure is broadly half that number. The fund also has a healthy revenue exposure to the US economy, which has of course been performing much better than most other economies recently. We would expect that to continue, albeit with a more modest growth rate going forward.
The fund also has a reasonable exposure to Europe and emerging markets, which implies a much greater level of geographic diversification than country of listing would suggest. Growth prospects for these regions may look somewhat less robust but it is important to note that we focus on dependable sources of growth, investing in businesses that do not need a buoyant economic environment in order to deliver sustainable long-term returns.
Despite this geographic diversification, the portfolio is actually much more UK-centric than the FTSE All Share index. This is down to our lack of exposure to oils, miners and other major global-facing businesses, which in aggregate account for a substantial part of the UK index but the vast majority of their revenues are sourced from outside the UK. Estimates of the FTSE All Share index’s UK exposure vary but most analysts suggest it lies somewhere between 25 per cent and 35 per cent by revenue.
In general, the “less constraints equals more opportunity” mantra is very important. I will always consider myself as a UK fund manager but, equally, I am delighted to have the scope to invest overseas where my knowledge of UK businesses lends itself to that context.
Neil Woodford is head of investments at Woodford Investment Management.