Woodford’s change of heart

Heather Ferguson | Fri 12 May 2017

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• Investments in Lloyds Banking Group and other economically-sensitive companies have been added to the portfolio
• An investment in GlaxoSmithKline has been sold from the fund, having held it for 15 years
• Having not invested significantly in banks for 14 years, and having held a relatively cautious view on the UK, this shift in positioning represents a significant change in the manager’s outlook

Concerns over Brexit and the UK’s upcoming general election have led many investors to avoid the UK in favour of overseas stock markets. This is not necessarily surprising, investors are often pessimistic on their home market. However, we suggest, and have suggested since the Brexit vote investors look past short-term political issues and focus on the long-term prospects for UK companies as the potential negative effects of the UK’s exit from the European Union have been overestimated, in our view.

Neil Woodford’s views have recently evolved to reach a similar conclusion. He has added a number of new investments to his CF Woodford Equity Income Fund, which he feels have been undervalued by other investors. The most notable addition is Lloyds Banking Group. The manager has not invested in banks since 2003, aside from a brief flirtation with HSBC in 2014. His avoidance of this sector sheltered investors from the worst of stock market falls during the 2008 financial crisis, and was one of the decisions that cemented his reputation as an outstanding fund manager.

Ten years on and Lloyds, which was one of his largest investments in 2002, is back on his radar. Neil Woodford regards the bank as a well-managed retail lender, with a conservative approach to bad-debt management. He also believes the company has the ability to pay a healthy and growing dividend.

Banks are heavily exposed to the health of the UK economy and the addition of Lloyds to the portfolio demonstrates the manager’s optimistic outlook. A number of other economically-sensitive companies have been added to the portfolio. This includes Barratt Developments, Taylor Wimpey, British Land and construction businesses Eurocell and Topps Tiles. Businesses such as these typically see their fortunes ebb and flow with the strength of the economy as they sell goods customers buy when they feel positive about their finances. The fund also features investments in smaller companies which tend to be more domestically focussed than their larger counterparts but are higher risk.

These purchases have largely been funded by the sale of GlaxoSmithKline. Neil Woodford has invested in the healthcare businesses for 15 years but has more recently lost faith in the company’s growth prospects. Three of the company’s four business units are underperforming and the manager has become concerned over the one area that has added value. He also feels investors could face a cut to the dividend.

Following this sale, and the subsequent purchases discussed above, the portfolio is positioned less defensively than it has been for many years, with significantly more exposure to economically-sensitive companies. Neil Woodford’s decisions are a reflection of where he currently finds value in the UK stock market. Investor sentiment towards many domestically-focussed businesses has been damaged by the UK’s decision to leave the European Union, but the manager feels these concerns have been overdone. His outlook for the UK economy is more positive than the share prices of these companies infer.

Our view

The manager has a long history of making big stock or sector bets and while these decisions have at times taken time to come to fruition, they have added significant value for investors over the long term, although this is not a guide to the future. We agree with the manager’s positive outlook on the UK economy and believe this change in positioning will prove positive for patient long-term investors. Like all funds its value will fall as well as rise, so investors could get back less than they invest.

Please read the key investor information document in addition to the information above.