What we can learn from Neil Woodford’s new portfolio

When I was a fund manager I was always taking peeks at my competitors’ portfolios.

There’s nothing wrong with a bit of nosiness, of course, but you’ve got to be careful. Whether you’re managing other people’s money or your own, it’s essential to have confidence in your own investment process and the stocks that it leads you to hold. Being unduly influenced by what’s going on across the street generally isn’t a good idea.

In fact, the worst advice I remember being given during a bad patch was: “Why don’t you just copy what Fred’s doing? His fund’s doing really well.”

I felt a bit like Wayne Rooney being told to copy the way Germany play, because they’re doing really well at the moment!

However, the truth is that we can often pick up some fresh ideas by looking at someone else’s fund. For example, it might suggest a theme or a particular stock that you mightn’t have considered otherwise.

In that spirit, and since the internet makes getting hold of this information so easy, I recently succumbed to the publicity and had a look at Neil Woodford’s new fund.

Here’s what I found.

Energy out, healthcare in

In case you’re not aware, since the retirement of Fidelity’s Anthony Bolton, Neil Woodford has been regarded by the media as the UK’s most successful retail fund manager.

And having spent most of his career at Invesco, he recently left to start up his own firm, and fund.

Normally you and I would be able to see only the top ten holdings, and would have to wait for the annual report to see the whole list, but Woodford has taken the unusual step of publishing the new fund’s entire portfolio each month.

So what interesting things can we learn from it?

Well, first of all, Woodford is avoiding some big sectors. There are no energy stocks, which is quite telling considering he has a bias to income. BP and Shell are major sources of equity market dividends, given their size, and yields of over 4%. In fact oil and gas is 14% of the All Share index; so this is a pretty sizeable negative bet.

In a similar vein he holds no mining or resources stocks, which represent a further 8% of the index.

Banking is the other big sector where Woodford is light. This was an industry he successfully avoided during the financial crisis. It was another big generator of income before the dividend cuts which hurt many other income-biased managers. Although the new fund does have a holding, it is a relatively small one in HSBC.

The main positive bet is healthcare, where Glaxo and AstraZeneca account for over 15% of the fund. Our familiarity with these two names means it’s easy to see them as a bit boring. But the failed bid for Astra and the current live one for Shire illustrates the value in these big drug stocks. Roche, Sanofi and Novartis are other pharmaceutical majors held in the fund.

But the bias to healthcare goes further. There are a couple of US listed stocks, Prothena and Alkermes; alongside a number of smaller domestic companies led by BTG.

No energy stocks, no miners, just one bank and heavy on healthcare – what does it all mean?

It’s a winning combination

I’d say Woodford’s statement here is pretty clear – and it tallies with my own view that we are in a period of great technological development in healthcare.

And from a portfolio viewpoint I really like this combination. There are big positions in solid income-producing blue chips, together with a fairly long tail of much smaller stocks with high growth potential – including a couple which are live recommendations in my Red Hot Penny Shares newsletter!

Woodford has another interesting way of getting exposure to early-stage growth stocks into his new fund. He has a large holding in Imperial Innovations and a smaller one in IP Group. I’ve written about both these stocks before.

These are investment companies that specialise in commercialising intellectual property coming out of our university system. Think of them as technology incubators. There’s also a good holding in new issue Allied Minds which does the same thing, but on the US side.

Should you invest like Woodford?

I mentioned earlier the folly of blindly copying someone else’s portfolio, but having had a glance at Mr Woodford’s list, there’s a portfolio construction lesson that I think we should consider.

His fund sits in the ‘income’ category but doesn’t limit itself to stocks with above average yields. It’s made room for several immature growth stocks, together with those incubator companies which don’t even pay a dividend.

This holds out the prospect for capital gains and small-cap excitement, on top of some solid income generation from the defensive big-cap holdings.

It’s an approach that I have a lot of sympathy with.

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2 Responses

  1. 17/07/2014, AndyA wrote

    Very interesting. Is the combination of tobacco stocks and healthcare stocks an example of irony? :)

  2. 19/07/2014, John O wrote

    re. Tobacco Giants
    Dangerous to disagree with Neil Woodford about these stocks but I fail to see his logic in this case. Perhaps he is just waiting for the first few dividends before selling them? But they are only giving around 4% which seems too low for the present company and stockmarket risk.
    Not much prospect of capital gains either: the UK companies are on too high valuations with declining growth so like the rotten habit are generally perceived to have such a toxic odour that investor interest is increasingly being poisoned.
    Perhaps they will recover by investing in other fields outside their cancerous concentration, but they can hardly be classed as recovery stories yet.

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