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Asset Management with Woodhill

Woodhill simplifies investing. We invest when we believe the risk is low and seek to protect your capital when we see risk as high. Our approach focuses on generating returns in all market conditions, with transparent and competitive fees.

We’re based in Bath, England, and are approved by the Financial Conduct Authority.

REAL-TIME WATCH

Up-to-date information on Woodhill Equity Fund and investment news.

September 2026 Newsletter: The Growing Disconnect Between Equity and Bond Markets

In the three months to the end of September, our fund marginally outperformed the UK market, with both rising by a little over 1%.

There was, however, an important distinction between our performance and that of the wider market. We remained fully hedged throughout the quarter, meaning that our positive return was generated by the relative outperformance of our high-quality equity portfolio rather than exposure to the direction of the market itself. We regard this as a particularly encouraging result, reflecting the contribution from stock selection while limiting exposure to broader market movements.

As already mentioned, we have now been fully hedged for an unusually long period. There are several reasons for this. Equity valuations remain elevated, although this is hardly a new development. More recently, however, a series of increasingly concerning risks has emerged, many of which show little sign of resolution and, in our view, may not be fully reflected in equity market valuations.

The situation in the Middle East remains unresolved. It could improve, but equally there is scope for further deterioration. Closer to home, the UK government faces an important Budget against a difficult economic and political backdrop. The new Prime Minister may find himself confronting many of the same challenges that undermined his predecessor. There is considerable ambition for new policies and spending commitments, but seemingly little political appetite for meaningful spending restraint. This raises the prospect of either disappointing policy outcomes or further increases in taxation and borrowing.

More broadly, we are concerned that the cumulative burden of taxation and regulation across the UK and much of Europe is constraining economic growth. Reviving growth is increasingly important, yet much of the existing policy framework appears to make that objective harder to achieve. Without a meaningful change in direction, the risk of further economic disappointment or political instability seems considerable.

These concerns are increasingly reflected in bond markets. One of the more striking developments this year has been the rise in long-term government bond yields. In the UK, the 30-year gilt yield has risen from around 5.0% in early spring to approximately 5.9%. Similar pressures have been evident in parts of Continental Europe and the United States.

In the US, stronger economic activity may help explain some of the increase in long-term interest rates. The same argument is less convincing in the UK and Europe, where growth remains weak. This suggests that bond investors may be becoming increasingly concerned about the scale of government deficits, the accumulation of public debt and the apparent difficulty politicians face in bringing public finances under control.

Historically, governments have often struggled to address persistent fiscal imbalances without the pressure of a crisis. We are not suggesting that such an outcome is inevitable, but the direction of bond markets is becoming harder to ignore.

From a shorter-term perspective, we are also surprised by the relatively limited response of equity markets to rising bond yields. Higher long-term interest rates would normally be expected to put downward pressure on equity valuations, particularly when those valuations are already elevated. So far, any adjustment has been relatively modest.

One possible explanation is that equity investors regard some of the current pressures as temporary, particularly those associated with the conflict in the Middle East. However, there is little indication of an imminent resolution, and the longer uncertainty persists, the greater the possibility that elevated bond yields become a more enduring feature of the investment landscape. Should equity investors begin to price in a prolonged period of higher interest rates, a more meaningful market adjustment could follow.

Looking ahead to the fourth quarter, there may nevertheless be an opportunity to remove our hedge. Markets are no longer as overbought as they were earlier in the year, and the passing of the UK Budget and US midterm elections could remove some of the uncertainty currently weighing on sentiment. This may create conditions for a year-end rally.

We will continue to monitor developments closely, particularly in bond markets, and will adjust our hedging position when our assessment of the balance between risk and potential reward becomes more favourable.

As always, thank you for your continued support.

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Woodhill’s Paul Wood returns to Professional Adviser with a look at stock market crashes, the rational and the emotions

Stock market crashes are the black holes of finance. No one fully understands them, yet their extreme nature suggests that they may tell us something important about how markets really work. While black holes are studied extensively, the same is less true of market crashes. There may be a reason for this. In a world of efficient markets and rational actors, there is little room for violent and apparently inexplicable events such as the crashes of 1929 or 1987.

True crashes are also rare, making it difficult to draw firm conclusions from them….

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When the Bull Stops Running

Bear markets and crashes are very different things. Bear markets can sometimes be identifiable and often have a recognisable pattern. It may be possible to see the conditions that precede them developing, just not exactly when they will occur.

Market crashes are a very different thing. They remain mysterious and are to market historians much like black holes are to theoretical physicists. They are extremely difficult to predict. For instance, the most famous crash (1929) occurred when the US stock market was very expensive (Shiller CAPE at around 31x), while the 1987 crash occurred when the market was ‘cheap’ by today’s standards. The Shiller CAPE at the time was around 18x compared with around 40x today. Valuation on its own has historically been of little use in predicting a crash. Fortunately, crashes are relatively rare. What is most interesting about them is that while they are a mass participation event (i.e. many sellers), even the people living through them often struggle to explain exactly what happened. This is itself fascinating and suggests that there may be (like with black holes) some important hidden truth here – but this is something for a different article.

Bear markets, by comparison, can be more understandable. Valuation can matter, and bear markets have historically displayed patterns and a type of anatomy that can be studied.

So, what causes a bear market? There is so much that could be written about this – but for an article of around this length there are some important historical observations that stand out.

  • Bear markets have often occurred sometime after a valuation spike or peak. This occurred ahead of the Great Depression, the 1970s bear market and the bear market of the early 2000s.
  • Bear markets have often followed either a wave of technological innovation (radio in the 1920s, photography and TV in the 1960s, the internet in the 1990s) or a fixed-asset investment boom (housing in the period leading up to 2007). A common characteristic has been overinvestment in a key and economically significant sector.
  • They are typically a much longer process than a crash. Unlike a crash, which can take place very quickly, bear markets can take years and are rarely a straight-line event. Historically, major bear markets have often taken several years to complete. One reason is that overinvestment in the booming sector needs to be worked through or reversed. This can contribute to a decline in earnings growth and may involve insolvencies and, in some cases, banking-sector problems, as occurred around 1929 and 2008.
  • Bear markets have often ended after much of the valuation increase associated with the preceding boom has reversed. A good example is the period from the 1990s into the early 2000s. The internet-related boom started in the mid-1990s, when the internet really started to take off. The Shiller PE was around 21–22x. The multiple peaked at around 43x in 2000 and subsequently returned towards the 21–22x level.

So where are we now?

A number of the characteristics historically associated with bear markets are present today. There has been a significant valuation increase (the Shiller PE is currently around 40x), and there has also been a very large investment boom associated with AI.

What might happen next – and how long could it take?

If some of the major AI projects ultimately turn out to represent significant malinvestment, this could contribute to a future bear market. ChatGPT was launched in November 2022. At that time the Shiller PE was around 28x. A return from the current level of around 40x to 28x would, all else being equal, imply a market decline of around 30%. In practice, of course, earnings and valuations change over time, so this should be regarded as an illustration rather than a forecast.

Another way of looking at this is that around the time ChatGPT was launched, the US market was substantially below today’s level. A return to those levels would therefore represent a significant decline. Again, this is an illustration of valuation risk rather than a prediction of where the market will trade.

Historically, major bear markets have sometimes taken three years or more to play out. An investor who believed that a bear market was beginning could simply decide to remain out of equities for an extended period. The obvious difficulty is that this could mean missing substantial gains if that judgement proved wrong, or during the significant rallies that can occur within bear markets.

Bear markets are multi-year processes and can involve substantial swings in both directions before the whole process is complete. This creates both risks and opportunities for active investment managers. An investment approach that pays particular attention to valuation, market history and downside risk may seek to navigate these periods by reducing exposure to significant market falls while retaining the ability to participate when conditions improve.

This type of environment is particularly relevant to the investment philosophy we have developed at Woodhill. We will see what happens next, of course. The future is inherently uncertain, but current valuations and the scale of investment associated with AI make this an unusually interesting period for investors.

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Fund Updates

The Fund

VT Woodhill UK Equity Strategic Fund in GBP (Source: VTIM)

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We launched the VT Woodhill UK Equity Strategic Fund on 2nd June 2014 as a UK large-cap equity OEIC. This means we’re domiciled in the UK, not abroad, and invest in large public companies. We’re authorised by the FCA in accordance with the UCITS Directive.

The fund’s objective is to generate a positive capital return over a 12-month period irrespective of market conditions.

Financial Thoughts

For Professional Clients only – not for Retail use or distribution.

This website is provided by Woodhill Asset Management LLP, which is an authorized fund manager regulated by the Financial Conduct Authority in the United Kingdom. The content of this website is for informational purposes only and should not be considered as investment advice or a recommendation to invest in any of our funds. Please contact us for more detailed information concerning the investment management services we provide to clients.

The value of investments and any income generated may fall as well as rise and is not guaranteed. Past performance is not indicative of future results. Investors should carefully read the prospectus and Key Investor Information Document (KIID) of the funds before investing.

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Woodhill Asset Management LLP is authorised and regulated by the Financial Conduct Authority in the United Kingdom, registration number 649832. This status can be checked with the FCA on 0800 111 6768, or on the FCA website. Registered in England No. OC389733.

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