Alex Savvides, manager of the £1.4bn JOHCM UK Dynamic fund, has railed against AstraZeneca (AZN)’s recent outperformance of GlaxoSmithKline (GSK), saying it was hard to understand why the former had become seen as ‘the Covid vaccine poster child’.
For the manager, the fork in the share prices of the UK’s two pharmaceutical giants is symptomatic of the ‘myopic’ focus on news flow around the coronavirus, for which his fund has been wrongly positioned.
Large allocations to the struggling consumer services, oil and gas, and industrials sectors – which contain many of the recovery and restructuring opportunities the fund targets – have also been a major drag. The fund has lost 31% this year, a performance for which Savvides has already apologised, compared to the 18.4% decline in the FTSE All-Share index.
‘Not only is there a sector mix issue but within sectors value continues to consistently underperform what might be deemed to be growth,’ said the manager, referring to the increasing divergence between cheap, higher-yielding stocks and their faster-growing counterparts.
‘And I do not think there is a better example currently, particularly in the large cap space, than Glaxo versus Astra, which to me seems a perfect example of high versus low expectations. But actually, more recently, it’s about perception versus reality.
‘This divergence has always interested us but it interests us more than ever and I think it points back to the market’s short-term myopic focus on news flow. It seems very clear that Astra has become the Covid vaccine poster child, where in reality it would seem far more likely to us that Glaxo’s vaccine business has much more chance of gaining from the pandemic,’ Savvides (pictured below) added.
Savvides’s fund had a 6.2% position in Glaxo, its top holding, at the end of June and nothing in Astra, which has become the UK’s biggest public company as its shares have risen 14.4% this year while its rival’s have sunk 9.8%. Since 2017, returns on Glaxo’s shares have been roughly flat, ignoring dividends, while its competitor’s stock has nearly doubled in price.
According to JOHCM figures, not owning Astra was the second biggest detractor from the fund’s performance in the first half of the year, in terms of weighting to individual stocks relative to the UK market. Only the holding in Wagamama-owner Restaurant Group (RTN), which has plummeted three quarters in value, detracted more from performance.
The fund did previously own Astra, but on the basis of annual reports has not since at least the end of 2017.
The Cambridge-headquartered company has partnered with Oxford University to work on a coronavirus vaccine, which was found to be safe and generated an immune response during early trials.
Savvides contrasted that with Glaxo’s ‘seven partnerships and counting’, speaking on the same day the firm announced an investment in Germany’s CureVac, which is working on a coronavirus vaccine itself. Glaxo is the world’s largest vaccine manufacturer by sales.
‘The focus on Astra’s one shot at goal at the moment is quite extreme. Particularly given that it is very unlikely that they will be selling this for material profit, it seems rather bizarre that it’s having such a positive effect on the share price,’ said Savvides.
The manager said Astra’s rise had essentially been driven by investors pushing up the ratio of its price to earnings – its PE multiple – since 2017, when the UK’s twin pharmaceutical giants had been similarly expensive on the common valuation metric.
‘You’re not paying for any of that hope in the Glaxo share price and, in reality, it has much more to gain and it has some very clear strengths in the business,’ he said, while adding the decision to steer clear of Astra could cost the fund further in the short term.
‘Deepest trough of underperformance’
Savvides (pictured) said the portfolio as a whole remained ‘highly sensitive’ to news on the coronavirus, which has continued to batter area such as global events, around 7% of the portfolio including names such as Hyve Group (HYVE), companies exposed to ‘housing transactions’, making up a tenth of the fund, including retirement community building McCarthy & Stone (MCS) and Crest Nicholson (CRST).
Savvides said the fund had always been cyclical in nature, with the strongest performance coming out of crises, but acknowledged the picture now looked stark.
‘This is very clearly the deepest trough of underperformance. We don’t think it’s tells the true story. I think news flows across the portfolio has generally improved,’ he said.
To the end of June, over three years the fund had lost 18.2%, compared to a total return on the FTSE All-Share of -4.9%, according to its factsheet. Over five, the fund’s 1.0% gain also lags the benchmark’s 14.8% return, but it has still outperformed the index since launch in June 2008, delivering 113% compared to the All-Share’s 79%.