The UK's most famous fund manager has built his reputation on two key calls during a near 30-year career in fund management: avoiding tech stocks during the dotcom bubble and shunning banks as the financial crisis hit.
Barring an investment in HSBC (HSBA) towards the end of his time at Invesco Perpetual, a position replicated in his Woodford Equity Income fund but then sold shortly after launch, Woodford had until this year not invested in high street banks since before the financial crisis.
But it has now emerged his move back into the banks predates that. Woodford invested in RBS earlier in the year in the £3.2 billion mandate he runs for national financial advice group St James's Place (SJP) and the £282.6 million Omnis Income & Growth fund he runs for fellow advice group Openwork.
Woodford revealed the investment at a conference hosted by online stockbroker AJ Bell last week. He said he had also started to buy shares in Barclays, although, as with the RBS investment, he has not done the same for his Woodford Equity Income and Income Focus funds.
Banks 'finally repaired'
The move underlines Woodford's warming to a sector he once deemend uninvestable. The manager argued his shifting stance was a reaction to changing conditions.
'I’ve said consistently since the financial crisis do not listen to what banks tell you about how healthy their balance sheets are,' he said.
'Do not believe that people don’t want to borrow money. The reason they’re not lending is that they can’t lend. The reason they’re not lending is because they don’t have enough capital.
'The reason I’m buying banks now is that I believe their balance sheets are finally repaired,' he added. 'Now they have sufficient capital, they will start to lend to the economy.'
Woodford argued that, with the bulk of capital building and regulatory fines behind them, banks could provide a rich vein of surplus capital for shareholders, but were still trading on cheap valuations.
'They’re cheap, they’re rated too low in my view and, not least because they are liquid vehicles that are exposed to the UK economy and you don’t need to go too far to understand why they are out of favour,' he said.
'My view is they look far too cheap and Lloyds is one of the most attractive plays in the UK large cap space.'
Brexit fears overdone
Woodford's warming to the banking sector has been accompanied by a conviction that UK domestic cyclical stocks have been oversold due to excessive pessimism over the fate of the UK economy under Brexit.
He overhauled his flagship Woodford Equity Income fund in April with a slant towards these stocks. But the move has so far done little to arrest a slump in performance, driven by high-profile portfolio hits such as the collapse in the shares of Provident Financial (PFG).
Speaking at the conference, Woodford said investor sentiment towards the UK was depressed but that Brexit talks were unlikely to deliver on investors' worst fears.
‘There’s a consensual view, in the UK and internationally, the UK is a basket case. UK economic exposure is something no international investor will want at the moment,’ he said.
Woodford argued that agreement on the UK's 'divorce bill' was likely in December, and said that even in the event of a 'no deal' Brexit 'there is no existential cliff edge for the UK economy'.
‘We are in the peak uncertain period at this point in time,' he said, also speaking at the conference. ‘International investors have all but given up on the UK. [They are saying] “I’m not going to bother with it.”’
But he argued it was 'highly unlikely' Brexit talks would end in a stalemate. 'Everything I read about the behaviour [of the negotiating parties], particularly of the Germans since their election, [suggests] to me they want to get a deal done.'