‘Between September 2015 and October 2017, the proportion of the portfolio’s revenues derived from the UK increased from 41.9 per cent to 55.5 per cent’ – Financial Times quote on Neil Woodford’s flagship £8bn equity income fund

The lengthy interview in the Financial Times a few days ago with the UK’s best-known fund manager Neil Woodford caught the headlines because of his referals to numerous ‘red flags’ and ‘extreme and unsustainable valuations’ in today’s investment markets. We do not heartily disagree which is why we talk a lot about our current strong preference for picking and choosing our specific investments rather than acting like an index fund. However it is the above quote that really caught our attention…because we completely agree.

Every Fund tends to have a few investment themes, some big ideas which help influence the choice of not just one but a number of individual investments. This is always helpful as a Fund solely driven by the isolated, individual analysis of a single company may lack coherence and may well miss out on the big picture investment opportunities out there which can support and justify more than one or two investment selections.

In the world of the Dynamic Opportunities Fund today’s most compelling investment theme is one which is close to home for many readers and/or investors: the UK. We have remarked before that a casual perusal of the world’s most popular regular survey of fund manager sentiment has consistently during 2017 shown both UK assets and the Pound as the most disliked areas for investment versus historic norms over the last few years. The reasons why – Brexit fears and the associated domestic political instability – do not need to be specifically elaborated on here but it is fascinating to us that this fear is so all-pervading and reminds us about Warren Buffett’s famous dictum of ‘being greedy (to buy investments) when others are fearful’. Of course many other factors have to be taken into account, including the specific characteristics and opportunities of individual investments, but collectively since the inception of the Fund we have found the undervalued UK investment theme an attractive one which has driven the instigation of a number of positions and meant that today around half of our investments are Pound-denominated.

A little over a year ago Europe and the emerging markets were the most compelling investment themes and during 2017 these opportunities have proved good sources of return for global investors wishing to embrace uncertainty. Both themes still have potential and help drive and justify other investment choices in the Fund but the nature of thematic anomalies and opportunities are that they will ebb and flow as the world’s economy and political actors evolve. This is why time spent thinking about big investment themes is never wasted even for a Fund which is ultimately selecting a relatively small number of individual shares.

Let’s see in a year’s time if not only whether Mr Woodford’s fears are justified but also whether the major investment theme in his and our Fund’s are the same or not. And the beautiful aspect of the world of investments is that…we cannot tell yet.