Wealth Manager - the site for professional investment managers

Register free for our breaking news email alerts with analysis and cutting edge commentary from our award winning team. Registration only takes a minute.

Woodford buys Lloyds and ends 'frustrating' 15-year Glaxo affair

2 Comments
Woodford buys Lloyds and ends 'frustrating' 15-year Glaxo affair

Neil Woodford has ended his bearish stance toward banks by buying a position in Lloyds, but ditched GlaxoSmithKline, jettisoning the pharma giant after a 15-year love affair . 

The move to buy banks is a reflection of his growing confidence in the long-term outlook for the UK economy, which has seen him build greater exposure to domestic cyclical business. 

Woodford's confidence was partly fuelled by prime minister Theresa May's decision to call a snap election for next month, which is expected to deliver a substantial Tory majority. 

'The news [has] fortified our growing conviction in an increasingly positive outlook for the UK economy, which now looks set to benefit from a prolonged period of economic and political stability,' Woodford said. 

Functioning banks

Woodford (pictured) has not held a mainstream bank since selling out of HSBC in 2014.

The decision to buy back into the sector through his flagship £10 billion CF Woodford Equity Income fund chimes with his long-held belief that banks should be viewed as warrants on economic growth.

In Woodford's view, in a modern ‘fiat money’ system, banks play a pivotal role in the economy through the creation of credit.

'When a banking system is functioning normally, credit creation fuels economic growth and the central bank monitors and influences the quantity of credit being created by adjusting base interest rates, as a tool for managing the economic cycle,' Woodford notes. 

In a benign economic environment, banks therefore offer leveraged exposure to economic growth, Woodford notes. 

'For much of the post-financial crisis period, the UK banking system hasn’t been functioning normally because it has been in a prolonged process of rehabilitation – rebuilding capital and slowly recognising losses that were incurred during the crisis,' Woodford said.

'Importantly, that process now appears to be largely complete in the UK, as evidenced by the recent pick-up in bank lending activity and, although the banks will likely continue to rebuild capital, the domestic banking sector looks more attractive as an investment proposition than it has in many years.'

'Specifically, we view Lloyds as a well-managed bank with a conservative approach to its balance sheet. Its valuation looks very attractive in our view, and it has the ability to pay a very healthy and growing level of dividend.'

'Frustrating' Glaxo

The Lloyds addition was in part funded by the disposal of Glaxo, 'where this evolution of strategy has catalysed a change of investment view'. 

'Over a holding period of more than fifteen years, I have consistently believed that GlaxoSmithKline was capable of delivering growth and realising shareholder value. Neither has been forthcoming to the extent that I had hoped and expected,' he said.

'Put simply, investing in Glaxo has been a frustrating experience, with three out of the four business units perennial underperformers. Some investors remain hopeful of recovery but I am now less optimistic. I have become more concerned about the prospects for the one Glaxo engine that has been firing on all cylinders. ViiV’s most important products, Triumeq and Tivicay, have been delivering robust growth over the past few years but that may now not be sustainable.

He added: 'There is a growing competitive threat in this market which could undermine Glaxo’s franchise. US biotech company Gilead is currently conducting trials in a potential competitor to ViiV’s Triumeq. Phase II data released in February suggested that this new treatment could undermine Glaxo’s hitherto robust market position ­­– phase III data is due later this year.'

ViiV has delivered more than half of Glaxo's growth over the past three years, he noted, and if this falters, the company's cash flows could come under pressure.

Other top buys 

Woodford has also recently bought a new position in UK brick manufacturer Forterra, believing that after years of being structurally challenged with a surplus capacity, the sector is looking more investable. 

'The domestic industry has consolidated and Forterra is one of the last remaining players with a solid market position and a low cost base,' Woodford explained.

'The weakness in sterling since last summer has meant that importing bricks from Europe is no longer as economic and the long-term prospects for Forterra now look very attractive.

'We believe the company is well-positioned to benefit from steady growth in the UK construction industry in the years ahead and took the opportunity to buy a meaningful stake in the business at what we consider to be a very appealing valuation.'

Other new additions in recent weeks include housebuilders Barratt Developments, Taylor Wimpey and student accommodation developer, Watkin Jones. He has also added construction materials businesses Eurocell and Topps Tiles, real estate businesses British Land, Hansteen, Londonmetric and Sirius Real Estate, along with technology service companies Softcat and Micro Focus and retailer Card Factory.

Woodford also participated in the IPO of Eddie Stobart Logistics. 'The IPO underscores how active and creative Stobart’s management team is in realising shareholder value from its collection of assets.'

Most of these additions were funded through inflows, although Woodford also took some profit from his position in British American Tobacco

Performance

Woodford delivered a positive return in April versus a decline in the benchmark. 

Financial services firm Provident Financial and Legal & General were positive contributors, alongside healthcare firm BTG

Online hostel booking platform Hostelworld was another star last month after delivering solid full-year numbers lifting its share price to record highs. 

'The company reported growth in booking volumes and announced it would be paying a special dividend this year,' Woodford said. 

'Hostelworld is clearly making solid progress and appears to have put last year’s trading disappointment behind it. At the time, we were confident that the decline in bookings volume was transitory and this now appears increasingly evident.' 

Intellecutal property company Allied Minds was one of the black spots, following its decision to halt funding to seven subsidiaries.

Woodford is keeping faith in the company though. 'We expect positive news from Allied Minds and the subsidiary companies it is now concentrating its attention towards, in the months ahead as it accelerates the process of commercialisation.' 

While Woodford has endured a tricky spell recently, over three years he remains ahead of the peer group, returning 29.7% over the three years to the end of March, versus a sector average of 23.8%. 

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Related Fund Managers

Neil Woodford
Neil Woodford
91/91 in Equity - UK Equity Income (Performance over 3 years) Average Total Return: -12.21%
Your Business: Cover Star Club

Profile: Altor's Towry graduates on launching a family business

Profile: Altor's Towry graduates on launching a family business

Altor Wealth Management was launched on of a shared vision to form a family-style company that would charge fairly and differently.

Wealth Manager on Twitter