It’s a bit over two years since Neil Woodford left Invesco Perpetual and set up his own asset management business. The CF Woodford Equity Income Fund he launched in June 2014 was almost a replica of the one he’d left behind at Invesco.
The new fund was initially dominated by 17 familiar FTSE 100 names and half-a-dozen US and European megacaps, which together accounted for almost three-quarters of the weight of the portfolio.
However, over the past couple of years, Woodford has ditched blue chip after blue chip. The number of international giants has been reduced to just two, while the following nine FTSE 100 companies have disappeared from the portfolio:
- BAE Systems, Meggitt and Rolls-Royce (aerospace & defence)
- Centrica and SSE (utilities)
- BT (telecommunications)
- HSBC (banks)
- Reckitt Benckiser (consumer goods)
- Smith & Nephew (healthcare)
Today, Woodford’s equity income fund holds just nine FTSE 100 stocks (one of which was in the FTSE 250 when he bought it).
I can’t recall a previous occasion when Woodford has shunned over 90% of the companies in the FTSE 100. While he’s never been afraid to pull out of some sectors of the market at certain times, there are currently whole swathes of the Footsie to which he has little or no exposure. His retained blue chip holdings tell a story of extraordinarily limited diversification by industry:
- AstraZeneca and GlaxoSmithKline (big pharma)
- British American Tobacco and Imperial Brands (tobacco)
- Legal & General and Provident Financial (financials)
- Babcock International and Capita (outsourcing)
- Next (retail)
So where is he investing now?
The reduction in the number of blue chip holdings and the increased sector concentration of the retained positions has been dramatic. Equally striking though, is where Woodford’s invested the money he’s pulled out of FTSE 100 firms.
We’ve seen dozens and dozens of smaller companies added to the equity income fund with an overarching theme of technology — particularly biotechnology. Even many of the holdings classified as financials or industrials are, in fact, incubators of small technology companies.
And, of course, the second fund Woodford launched in April 2015 — Woodford Patient Capital Trust — is also very much all about these types of companies (he soon dropped a handful of FTSE 100 stocks that figured in the trust’s portfolio early on).
So what’s behind Woodford’s huge move into this area? He wrote in March last year: “Increasingly, innovation in the pharmaceutical industry is being driven by what was learnt and then built on 15 years ago with the decoding of the human genome. The market was right to be excited by this important and exciting scientific breakthrough — it was just wrong on the timing.”
He reckons the time is now ripe for businesses operating directly in this field, or in areas associated with it, to start delivering profound and positive benefits for investors and patients alike — and he’s backing his judgement on this to the hilt.
The dramatic reduction of FTSE 100 holdings and mushrooming of exposure to the small-cap technology theme represent, I’d suggest, the biggest conviction bet of Woodford’s career.
It’s going to be interesting to see how this plays out, and it’s certainly giving me food for thought about where the best opportunities for investors might be found in the market today.
