It’s no secret that Neil Woodford has had a “disappointing” year so far. He’s admitted as much himself. His trio of fund offerings have underperformed both their benchmarks and sector averages.
The star fund manager has taken big hits on what were some of his highest conviction ideas. His stake in Provident Financial (PFG) has plummeted 70% in less than five months. His holding in the AA (AA.) has slumped 40% year-to-date.
But he’s resolutely sticking to his guns. “People think that you need to evolve, change, you need to bring new disciplines, new approaches… I’m not so sure,” he told an event in London on Thursday.
He claimed “many of the characteristics of financial markets that existed centuries ago are prevalent today”. He said his job is to screen out the “noise” from the media and “focus on what’s really relevant”.
While that’s become more challenging due to the volume of information out there, “the fundamental job of analysing an economy and analysing valuations hasn’t really changed”.
Woodford spoke candidly about a number of his holdings at the event and Morningstar has collated his views below.
Woodford on… the Banks
One of the big changes to Woodford’s portfolio has been his U-turn on banks. His long aversion to the sector was last broken in a two-month foray into HSBC (HSBA) in 2014, his first bank buy in over a decade.
“I’ve said consistently since the financial crisis do not listen to what banks tell you about how healthy their balance sheets are,” he explained. “The reason that they’re not lending isn’t because they can’t lend, it’s because they don’t have enough capital.”
Now, he believes they have finally repaired their balance sheets. He began building a large stake in Lloyds (LLOY) in May. He also revealed he’s recently bought stakes in Barclays (BARC) and RBS (RBS).
Woodford acknowledges there are more issues to navigate, including RBS’s outstanding fine from the US Department of Justice. But those past misdeeds are largely behind them. Now their balance sheets are repaired and they have sufficient capital, they can start to lend again. It’s why he’s bullish on the outlook for the UK economy.
“The surpluses they have been generating for some time can now be returned to shareholders in the form of dividends. My view is they are far too cheap and that Lloyds is one of the most attractive shares in the UK large-cap index,” he says.
Woodford on… AstraZeneca
Woodford’s largest portfolio holding currently is a company that’s had a rocky 2017. AstraZeneca (AZN) saw its stock fall 17% in July when a clinical trial on its flagship Mystic cancer drug failed. Woodford described that as the market having a “hissy fit”. He “remains confident that Mystic will work” and receive a positive result from a further study in the first half of 2018.
Astra since made up most of that lost ground and currently sits just below the £50 mark. That’s still a 10% less than the £55 per share Pfizer offered for the company back in 2014. At the launch of Woodford's fund Astra shares were worth £43.
But Woodford is undeterred. “What we argued then was we would make more money in the long term from Astra as an independent entity because we believe in Pascal Soriot’s transformation of the business.”
The manager claims Astra’s pipeline is the most attractive of any pharmaceutical company around the world. “The progression free survival Mystic trial was only one element of a whole portfolio that will drive the Astra story for years to come.”
Woodford on… GlaxoSmithKline
He may run a whole portfolio built around so-called patient capital, but Woodford says he eventually “lost patience” in one company this year. That was Astra’s large-cap pharma counterpart GlaxoSmithKline (GSK).
At the same time Woodford first bought Lloyds, he dumped his stake in Glaxo, a stock he had held for more than 15 years. It came as Glaxo announced its long-serving chief executive, Andrew Witty would be replaced by Emma Walmsley.
Walmsley had previously run the company’s consumer healthcare division since 2010 and Woodford slammed the decision as “essentially a continuity candidate”. “For me, that was the opposite of what they should have done. I wanted Glaxo to vote for change, to vote for a different strategy, which I felt would deliver better value to shareholders going forward.”
The fund manager said that strategy may emerge under Walmsley in time and noted the “very interesting” appointment of Hal Barron, formerly of Google-owned California Life Sciences, as head of R&D, made on Wednesday. Barron “has a fantastic reputation”, Woodford said.
“I exited Glaxo because I lost confidence in the company embracing what I believe to be a better strategic vision. However, I will continue to monitor the situation and maybe in time Glaxo might be back in the portfolio if and when that does happen,” he concluded.
