There aren’t many institutional investors in the City that I pay too much attention to. However, when I hear Neil Woodford speak, I find that it can pay dividends to at least listen to what he is saying.
And while I do not always agree with his views, as an investor I find that is always important to listen to an opposing view, or the bear argument as it were. I find that this helps defend against one of the worst enemies of the private investor: confirmation bias.
Confirmation bias is defined as a psychological phenomenon that explains why people tend to seek out information that confirms their existing opinions and overlook or ignore information that refutes their beliefs. Confirmation bias occurs when people filter out potentially useful facts and opinions that don’t coincide with their preconceived notions. It affects perceptions and decision making in all aspects of our lives and can cause us to make less-than-optimal choices.
Seeking out people and publications with different opinions than our own can help us overcome confirmation bias and make better-informed decisions.
So when I read the thoughts of Mr Woodford on GlaxoSmithKline (LSE: GSK) and the banking giant HSBC (LSE: HSBA), I felt compelled to take note.
Breaking up, or spinning off?
Commenting on his investment in GlaxoSmithKline at AJ Bell’s Investival conference in London in November, the investing legend revealed that Glaxo had been a very disappointing investment for him for a very long time, and that his hopes for the business have been not been realised to date. Despite the disappointment, the company still features heavily in both his equity income fund and Woodford Patient Capital Trust, as he still believes that there is vast unlocked value in the business.
In particular, he felt that the corporate structure is “wrong”, claiming chief executive Andrew Witty is running multiple companies and, rather controversially, “not doing a very good job of it”.
Woodford believes GlaxoSmithKline should keep its pharmaceutical and vaccines businesses and spin off or sell the consumer healthcare arm. He could have a point: spin-offs can often turn a fantastic profit for investors, and below are a couple of examples.
Essentra (formerly Filtrona) spun off from Bunzl in 2006. During that time it has trounced the FTSE 100, and it has handily outpaced the blue-chip index by some margin over the last 12 months, too.
More recently, Indivior spun off from Reckitt Benckiser earlier this year. It too has beaten the main index by some margin, despite coming off a bit following a less-than-well-received trading update.
Is a recovery for HSBC on the cards? Don’t bank on it!
I suspect that there were a lot of rattled investors, both institutional and private alike, who took a long hard look at their holding when the fund manager sold his entire position in banking group HSBC just two months after acquiring the shares.
The reason given by Woodford centered on concerns about investigations into past actions potentially exposing the bank to significant financial penalties. Despite signs that most of the bad news is in the open, the fund manager isn’t tempted to revisit the subject, taking the view that the big banks are hard to analyse, as well as his belief that the businesses face very challenging headwinds. Given all of these factors, perhaps unsurprisingly Woodford believes that he can do better elsewhere.
However, if forced to invest in a bank, HSBC would be that bank, given that he felt that it was a well-run bank in an attractive growth region of the world.
Is the master investor right?
Well, that is the million dollar question. My view, as is usually the case, is quite simple.
In the case of Glaxo, I think that investors should wait to see how the deal with Novartis plays out before taking a view. The CEO, Sir Andrew Witty, sounded confident about the company’s prospects when the Q3 results were announced:
“This quarter’s performance reflects continued execution of our strategy. The benefits of the recent 3-part transaction are becoming evident in our sales and earnings performance and we have made good progress on our restructuring and integration programmes during the quarter”.
In the case of HSBC, I believe that there is plenty of work to be done in order to make it a leaner, fitter, and importantly a more trustworthy organisation. That in itself will make sure that the shares move around from quarter to quarter, but like Glaxo, investors can sit back and enjoy a 6%+ dividend.
And in the event that management get it right, I would expect to see the shares start to tick up from their current out-of-favour status as the chart below depicts.
