OpinionDec 14 2015

Biotech belief may place Woodford at mercy of others

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My only prediction for 2016: Neil Woodford will again not be far from the headlines. Not exactly a bold statement – but perhaps it’s worth asking what form these headlines may take.

Of late, the manager’s attempt to install a former FBI agent on the board of US company Northwest Biotherapeutics has attracted considerable attention.

That’s hardly surprising – introducing a hint of counterintelligence to the practice of activist investing is unusual, even for Mr Woodford.

Northwest has been the subject of a short-selling attack for some time, but accusations only began to affect the company’s share price in earnest this autumn.

This is not the only time this year that Mr Woodford has been confronted by such an issue: Allied Minds, a top 20 holding in his income fund, saw its share price slump in September after a similar attack.

The manager has acknowledged the Northwest development represents a “bump in the road” – hence his (ultimately unsuccessful) attempt to strengthen its board – but he has rejected the Allied Minds criticisms.

I don’t profess to know who is in the right here, and early-stage, little-known companies are hardly new avenues of interest for the manager. His Patient Capital trust focuses specifically on this area, and his equity income fund has operated with a ‘long tail’ of these companies for several years now.

I do wonder, however, if the fact that many of these stocks are biotechnology firms could become a problem in itself.

This isn’t to imply there are troubles waiting to be found among Mr Woodford’s other holdings. Instead, I’d ponder the implications of the sector as a whole coming under closer scrutiny.

This is only natural. The Nasdaq Biotechnology index had trebled over the past four years. That’s the kind of performance which suggests shorter-term investors are now looking for reasons to sell rather than buy.

Woodford Investment Management’s Mitchell Fraser-Jones alluded to this dynamic in October when he addressed the sudden change in sector leadership seen in the US equity market.

An abrupt shift out of healthcare stocks and into beaten-up energy positions was likely driven by momentum investors changing course, Mr Fraser-Jones noted.

The trend proved short-lived, but it was not the first time we have seen biotech stocks of all kinds swept up in this kind of reversal – a similar situation took place in spring 2014.

The response to clients has rightly been to emphasise a longer-term view, but advisers should at the very least be aware that this dynamic could play out again next year.

The response to clients has rightly been to emphasise a longer-term view, but advisers should at the very least be aware that this dynamic could play out again next year.

Mr Woodford takes pains to root out problems on a case-by-case basis, and will have encountered plenty of short-sellers in his time. As long as short-term investors populate one of his favoured sectors, however, one of the UK’s best-known activists may find part of his portfolio at the mercy of others’ whims.

Dan Jones is editor of Investment Adviser