After more than a quarter of a century of phenomenal success running funds for grateful clients, Neil Woodford knows more than a thing or two about managing a portfolio through all manner of political upheavals, economic cycles and stock market ups and downs.
Before the Brexit vote
Woodford had a good deal to say in the run-up to the referendum, both on the macro outlook and the positioning of his portfolio.
In brief, his take was that a leave vote would lead to short-term uncertainty, but that the UK and the world face much bigger challenges than Brexit, including — but not limited to — weakening global growth, excessive debt, and deflation.
As far as the positioning of his portfolio was concerned, he said he was invested in businesses that he believes will deliver high-single-digit growth per annum “despite these significant macro headwinds.” He added that “these companies trade on valuations which do not reflect that capability” and that “the portfolio strategy will not change on a ‘remain’ or ‘leave’ vote”.
Buying the domestic sell-off
After the ‘leave’ vote Woodford and his team observed that: “The initial sell-off gave way to pronounced rotation, as investors fled from domestically exposed stocks to those with global revenues. This move was largely indiscriminate, at least regarding valuations, as many market participants appeared determined to make the switch at almost any cost”.
Woodford was keen to take advantage of “the ill-informed investor behaviour (essentially, panic!), that is a common characteristic of financial markets in a state of shock.” He didn’t go buying any and every UK-facing business that had taken a hammering — for example, banks continue to be shunned — but notably added to two existing holdings “at highly distressed share price levels”.
Insurer Legal & General (LSE: LGEN) and sub-prime lender Provident Financial (LSE: PFG) fell 30% and 25%, respectively, in the immediate aftermath of the Brexit vote. Woodford and his team reckoned that this was a result of investors simply ditching domestic cyclicals and financials “regardless of valuation or prospects” — and having spoken to the management of both companies since the referendum they “have concluded that both businesses remain well-placed to deliver very attractive rates of sustainable dividend growth in the years ahead”.
The shares of the two companies have recovered somewhat but continue to look attractively-valued to my eye. L&G trades on a forward P/E of 9.7 with a dividend yield of 7.2%, while the scores on the doors for the less-cyclical Provident Financial are 15.4 and 4.9%.
Babcock International, Capita and New River Retail are among other UK-facing businesses Woodford has added to since the vote.
Strong risers
Woodford’s tobacco stocks and major pharmaceutical companies, such as AstraZeneca (LSE: AZN), GlaxoSmithKline (LSE: GSK), Roche and AbbVie, were strong risers: “Indeed, such was the extent of the share price appreciation in some of these businesses, that we reduced the portfolio’s exposure to them,” he said, with Roche and Reynolds American singled out for mention in this respect.
I note, though, that AstraZeneca and GlaxoSmithKline were still ranked at two and three in the Equity Income Fund at 30 June with weightings of 8.1% and 7.6%, respectively.
Again, I also see value in these two stocks, which have nice dividends and, I believe, bright long-term futures. AstraZeneca trades on a forward P/E of 15.8 with a 4.5% dividend yield, and Glaxo on 18.2 with a 4.9% yield.
