I recently visited Woodford Investment Management’s new offices and spent time with Neil Woodford and his team of fund managers.
At the start of this year, I promised I would return to this subject once he had got his feet under the desk with the new fund.
For a manager who genuinely manages money with the long term in mind, it is a little absurd to dwell on short-term performance. Nonetheless, at the time of writing, it is pleasing to see this fund at the top of the IMA UK Equity Income sector performance table since its launch.
Many commentators had doubts about Mr Woodford’s new venture; they were concerned he might be overwhelmed by significant inflows of new money, or that he would be caught out by market-makers quoting the prices for companies in which they anticipated he would invest. These issues have not hindered performance so far, while positive cashflow into the fund has undoubtedly helped him.
His views have changed little this year. He remains cautious in his outlook for the global economy and, if anything, he is more cautious. Most politicians and central bankers are not taking the medicine of tackling heavy debt burdens head-on. Instead, they have inflated demand for certain assets. The value of an array of asset classes has been boosted, from classic cars and artwork, to more conventional investments such as shares, bonds and property.
This prompts the question: how can you achieve true diversification if all asset classes are expensive?
While he is cautious, his search for out-of-favour and overlooked companies has led him to areas where he believes value remains.
For example, many small, early-stage businesses have been left in a backwater where few investors venture, yet they are calling out for investors’ capital to help nurture growth.
Mr Woodford has found a number of exciting opportunities in this overlooked area, investing in companies such as Imperial Innovations and Allied Minds. The former provides funding for research and product development emerging from leading UK universities. These projects could ultimately be commercialised and, with careful nurturing, could become tomorrow’s larger companies. Allied Minds is a similar company, though it also has an arm in the US defence sector, in effect commercialising military solutions to problems such as mobile security.
Significant exposure to healthcare remains, comprising around one third of the portfolio, which is not solely focused on larger businesses such as AstraZeneca (a current holding). We discussed businesses Mr Woodford is backing, such as cutting-edge technology in wound healing, which he believes could transform the treatment and care of wounds globally.
Research by the adviser Hargreaves Lansdown suggests smaller companies currently account for around 13 per cent of the fund. They tend to offer little in the way of income, though the fund’s yield is supported by other parts of the portfolio, as plenty of the remaining stocks offer an attractive yield. Lloyd’s insurance vehicles such as Amlin and Catlin, for instance, pay generous dividends. He also points to companies such as Drax, which he expects will announce a stronger dividend policy in due course.
Retailer Next is an example of a larger company held in the fund. Mr Woodford regrets not holding it as part of the fund’s core in the past, though he has used recent weakness to top up this position. While he is not keen on the retail sector as a whole, he believes Next will gain greater market share aided by its successful online service, which is being expanded internationally.
Mr Woodford is ably supported by brothers Paul and Stephen Lamacraft, and Saku Saha, all former colleagues at Invesco Perpetual.
The latter is a fine example of what I call lateral recruiting. Beginning his career as an army engineer and progressing to an intelligence officer in Afghanistan, Mr Saha brings far broader skills to the table than just his economics degree. He mainly supports the lead manager in the unquoted, smaller companies space.
Following our last few meetings, it is clear Mr Woodford is confident in the exciting, young companies in which he has invested. Given time, capital and patience, these businesses could grow into global players of the future. In my view, this is an extremely attractive proposition when combined with companies already paying a healthy yield with good visibility of earnings. I consider this to be a core UK equity income fund for investors who can truly think long term.
Mark Dampier is head of research at Hargreaves Lansdown. For more details about the funds mentioned in this column, visit www.hl.co.ukReuse content