Star UK equity income fund manager Neil Woodford has bet against the dollar, calling the bottom of the sterling slump. Woodford, as with many other fund managers invested in large UK companies, benefitted from the fall in sterling last year, which boosted the revenues of his internationally-focused holdings.
On June 23, £1 was worth $1.49, but following the Brexit vote, the pound fell as low as $1.20 on January 16 this year. Today it is worth $1.24. Woodford hedged his portfolio to benefit from the eventual rise in sterling in mid-October when the pound was worth $1.21.
The Falling Pound and the Rising Market
A week before the Brexit vote, the FTSE 100 sat at 5,924. The stock market hates uncertainty, and Project Fear was doing its very best to convince voters that should they opt to leave the European Union there would be disastrous consequences for the UK economy and businesses.
But that proved not to be the case. While the jury is still out on the long-term fate of UK plc, the FTSE 100 now sits at 7,378 just shy of its all-time high. This considerable rally is due in the most part to the devaluation of sterling. As 70% of the FTSE 100 companies’ earnings come from overseas, any drop in the value of the pound is a benefit to the bottom line of these large caps – meaning global companies have made great gains such as Standard Chartered (STAN) which is up 72% in the past 12 months, British American Tobacco (BATS) up 37%, Unilever (ULVR) which has risen 31% and Diageo (DGE) has gained 27%.
It is worth noting that the best performing stocks of the past year are oils and mining stocks thanks to the duel boost of weakened sterling and a considerable commodity rally.
Many fund managers – and private investors – who held stocks in the FTSE 100 saw considerable gains in the second half of the year, including UBS UK Equity Income which gained 35% in 2016, Jupiter Income Trust which gained 19% and Majedie UK Equity which made 20% last year.
Woodford Equity Income had a more muted annual gain of 3%, dragged back by losses in the fourth quarter. The fund lagged the index, and competitors, as Woodford does not hold oil and mining stocks.
What Woodford Says
In October Woodford told clients that he had been “anticipating sterling weakness and broadly, this played out as we expected following the Brexit vote”.
He continued: “The portfolio has benefited from being unhedged in the period since launch, but we now believe that the weakness in sterling has gone far enough and so hedges were introduced against all remaining foreign currency exposures towards the end of the month.
“As with all investment decisions, this reflects a long-term view – we have no insight into what will happen to sterling on a three-month view, but on a three-to-five-year view, we no longer expect further material weakness in the domestic currency.”
The hedge is still in place and is thought to have added value to the portfolio at the current exchange rate.
