Markets pause for breath!

FTSE100 @ 6352.7, +22.21 (+0.35%)

OK, so markets have subsequently taken a breather and found themselves wanting somewhat. 

But, whilst economic recovery continues to be viewed as fragile, the current concern seems to be that markets might have to fend for themselves a little more without the crutch of central bank stimulus.
For myself, I would suggest the sooner the better as the dependency on artificial cashflows breeds complacency rather than competition and performance improvement.
Similarly this can be seen in the behaviour of some borrowers in this current environment, where some just won't take the opportunity to change behaviours, preferring dependency to independence and fully expecting assistance to come from somewhere in order to maintain their unrealistic lifestyle expectations.

But, that aside, there is still the strong view that there are invest able funds out there, waiting on the sidelines, both in companies and in managed funds waiting for opportunities to present themselves as company cashflows continue to strengthen and recent stock market performance attracts investors back into markets again.

Slight concern for me that the next phase in markets may coincide with a need to invest should economic demand start to increase and new "fledgling" markets open.
That being the case, it might be that company forecasts will disappoint in the short term but that strategic investment should only enhance prospects in the medium to longer term for those companies that are well managed and have a well thought out strategy.

In light of my view that markets are dominated by a short term interest, I will be an interested observer of analysts, and investment views that appear to respond adversely to what appears to me to be normal and expected ie. sell these companies for others with better short term prospects and so on and so forth in an ever diminishing cycle.
Would that deter some companies from investing in a longer term strategy, just to keep analysts and city views positive in the short term? I hope not.

But, in terms of this next phase, I can see it happening already in such as Vodafone with the introduction of 4G, but also in other industries where the traditional customer base moves online (supermarkets), or in tangible industries like manufacturing and construction where new plant and equipment, new technology, and land comes back into growth plans, along with a review of inventories and working capital.
The downturn should have presented companies with opportunities to make efficiency savings in preparation for recovery so that the yield from working capital can be maximised as demand increases.
And its those companies that can adapt quicker and gear up to increased demand that might yet achieve new higher levels of cashflow and profitability in the coming years.

But if companies can't gear up to increasing demand cashflows and profits will plateau; if they have to invest, profits will dip in the short term; and if they haven't made efficiency improvements then profits and cashflow will drop off as the demand for greater working capital absorbs cash and/or increases borrowings.

As ever, an increasing demand for capital to invest might end up coinciding with increasing interest rates so foresight is required.

Even more risky but tempting for seemingly asset rich companies would be expansion through acquisition which brings its own risks given valuation premiums, and existing goodwill.
This can then be followed by integration problems compounded by cultural issues.

And, worryingly this can be a particularly tempting option when new management comes in, but not always executed with the company's and shareholders interests in mind.

So, as ever its these well managed companies, with clear, logical strategies that I want to look out for. 
If I can spot the signs of course!
Although I would hope that at least some of the signs would be in the companies that I already look for!

May 2013: Following Woodford update

Hmm, well the 3 picks continues to make a charge and has now recorded a 17.39% increase since the beginning of the experiment. 
Still not enough to take it off the bottom spot as the Edinburgh Investment Trust is still showing a 20.57% increase.
But, the flagship High Income Fund managed by Neil Woodford remains out in front with a 23.07% increase.

Dividends came into the Investment Trust and the 3 picks, the latter receiving its dividend directly from British American Tobacco.
All 3 elements of the "picks" have stepped up lately with BT in particular being boosted by reception of its new marketing plans involving free issue of its quota of Premier League games with Broadband packages.
But it has also been a long time since Glaxo was last at £17, and BAT is continuing its long term rising trend.

As at the end of April, the 3 picks occupied 19.56% of the High Income Fund and maintained a position within the Funds top 10 holdings (http://www.invescoperpetual.co.uk: Invesco Perpetual High Income Fund).

			Shares	31.05.13
Inv. Perp. High Income			1110.14	6.65	7384.13	23.07%
	Residue				0.00
	Dividends
	Total		6000		7384.13	23.07%
Edinburgh Investment Trust			1182.00	5.85	6914.70	15.25%
	Residue				0.43
	Dividends				319.14
	Total		6000		7234.27	20.57%
3 Picks
BAT			61.00	36.23	2210.03	10.50%
Glaxo			138.00	17.14	2364.63	18.23%
BT			788.00	3.02	2380.55	8.57%
	Residue				0.00
	Dividends				87.96
	Total		6000		7043.17	17.39%
Transactions in the month:
Invesco Perp. High Income			N/A
Edinburgh Inv. Trust
Edinburgh Inv. Trust			23/05/2013	Div	59.1
3 Picks
	BAT		08/05/2013	Div	56.55

Click to enlarge, close to return.

Related post links:

- April 2013: following Woodford update.

- March 2013: "following Woodford" update.

- February 2013: "following Woodford" update.

- January 2013: "following Woodford" update.

- http://www.invescoperpetual.co.uk: Invesco Perpetual High Income Fund

Note: Unlike my Portfolio updates (Portfolio Updates.) which reflects an actual investment portfolio, "following" Woodford is an experimental strategy and a virtual portfolio.