Ace fund manager Neil Woodford engaged in a good deal of trading during May. His flagship CF Woodford Equity Income Fund was active in the blue-chip arena, but also bought into a number of new small caps. The latter are the type of companies that will figure more prominently in his recently-launched growth fund, Patient Capital Trust.
New small-cap buy Horizon Discovery (LSE: HZD) caught my eye, while Woodford’s team also had some interesting comments to make on the big pharma sector, as the fund dumped its holding in French group Sanofi and bought more shares in GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and AstraZeneca (LSE: AZN) (NYSE: AZN.US).
Blue chips
Drugs giants have long been core holdings in Woodford’s portfolios, as the master investor sees “a fundamentally undervalued industry”.
As the purchase of more GlaxoSmithKline and AstraZeneca testifies, Woodford’s sale of Sanofi doesn’t signal a change of heart on the sector. Sanofi is “simply a casualty of the competition for capital in the portfolio”. A good run up in the French firm’s shares provided an “opportunity to sell and reinvest in companies that we view as even more attractive in terms of long-term total return potential”.
Longstanding holding GlaxoSmithKline has been “frustratingly disappointing” for much of the time Woodford has held it.
“It is valued by the market as a struggling pharmaceuticals business — a view that we have some sympathy with because the pharma business [two-thirds of turnover] has performed poorly operationally”.
However, Woodford’s team reckons the market has got it wrong by failing to appreciate the other areas of Glaxo’s business: vaccines and consumer healthcare:
“In particular, the current share price dramatically underappreciates the value of ViiV healthcare, Glaxo’s specialist HIV business. We continue to see considerable inherent value in Glaxo, however, and believe the sum of the parts to be significantly greater than the whole”.
Glaxo’s shares were trading above £14 throughout May, when Woodford was buying, but you can currently pick them up below that level on a forward P/E of 17 with a dividend yield of 5.8%.
AstraZeneca’s shares are also cheaper now than during May. They’re currently trading at around £42.50 on a forward P/E of 15.5 with a 4.4% yield.
Woodford was disappointed with news during May that US group Amgen had terminated its partnership with Astra to develop psoriasis treatment brodalumab. However, Woodford’s team remain bullish on the UK company, maintaining that Amgen’s withdrawal “doesn’t undermine an investment case which is supported by an excitingly diverse pipeline of potential new therapies”.
Elsewhere, among the blue chips, Woodford was happy to continue adding to Centrica and Legal & General, as well as to mid caps Homeserve and IP Group.
Small caps
Woodford introduced a number of small caps to the fund during May. Some of these are unquoted companies or listed overseas (for example, Norwegian fingerprint technology business Idex), but some are more readily accessible to the average UK private investor.
The fund took “a small but extremely interesting position” in Verseon, a US-based but UK-listed firm that applies a physics-based approach to drug discovery, and also bought into AIM-listed Horizon Discovery, a life sciences business which supplies research tools and services to help translate the human genome and accelerate the discovery of personalised medicines.
Horizon Discovery did a placing at 190p a share to raise £25m at the beginning of May. Woodford’s participation in the placing gave him a stake in the company of over 11%. Horizon is currently loss-making (£5.9m last year), but the proceeds of the placing will enable the company to accelerate growth, and you can currently pick up the shares below the placing price; they trade at 180p, as I write.
