The FE Alpha Manager bought into the sector a couple of years ago when it was unloved by most investors and has been rewarded with strong growth as it has finally come back into fashion. The manager’s reputation has been built on making a number of big sector calls that have been proved correct: he avoided tech stocks in the run-up to the dotcom crash and banks prior to the 2007 crisis.
His giant Invesco Perpetual Income and Invesco Perpetual High Income funds are currently heavily invested in the controversial outsourcing sector, which is suffering after a number of scandals.
Few other managers are so positive on the sector, which raises the question of whether private investors should take a more positive view of it given Woodford’s track record.
Capita is a top-10 holding in the manager’s Invesco Perpetual Income and Invesco Perpetual High Income funds, forming 4.2 per cent of the former and 4.28 per cent of the latter.
Only eight other funds hold it in their top-10, despite its recent appreciation.
The company has remained scandal-free in recent months, unlike rivals G4S and Serco, which the manager also holds in both funds.
Data from FE Analytics shows that Capita has been the standout performer in the sector over the past year, more than doubling the returns of the FTSE All Share while the other two stocks have underperformed.
Performance of stocks vs index over 1yr
Source: FE Analytics
Capita has returned 40.86 per cent over 12 months, according to data from FE Analytics, while the FTSE All Share has made 18.13 per cent.
Brokers have started to downgrade the stock from a buy to a sell on the back of its strong share price performance and Invesco reduced its holding in July, according to an RNS announcement, selling 2,745,405 shares which left it with 144,177,938. Invesco holds 21.9 per cent of the company.
The story is different in the rest of the sector, however. G4S was thrust into the headlines last year after it was forced to admit it would not be able to fulfil a contract to supply security guards to the Olympic games.
Shares fell precipitously in the summer and finished the year 2.57 per cent down.
Performance of stock vs index in 2012
Source: FE Analytics
At the time, some analysts suggested the reputational damage could hit the company hard when it came to winning future contracts.
However, Invesco made no significant reductions in its shareholdings, according to public RNS records.
Even though shares suffered a more violent fall in May after disappointing results and the company was subsequently dragged into another scandal surrounding a contract to tag offenders, Invesco, whose head of UK equities is Woodford, gave the company a huge vote of confidence by buying further shares at the end of July.
The tagging scandal saw the Serious Fraud Office launch an investigation into allegations the Ministry of Justice was charged for 18,000 tags when only 15,000 were used at any one time.
G4S was investigated by the SFO, but not Serco, after the latter pulled out of tenders and allowed auditors access.
Bill Gates is another famous investor to have stuck by the company despite its recent travails.
The company has this week raised £350m through a share placing as it seeks to repair its balance sheet, and media reports suggest Woodford once again bought in.
This is not a popular view, however, and Graham Spooner, investment research analyst at The Share Centre, explains why he continues to recommend the stock as a "hold" rather than a "buy".
"This morning, G4S reported half-year results that appear to be at the lower end of expectations as it announced the second half will be focused on consolidation," he said.
"The group revealed more restructuring plans from the management in an attempt to boost the balance sheet and improve its damaged reputation."
"The strategic review includes a new share placing and the disposal of businesses. G4S has agreed to sell off its Canadian Cash and Columbian Data Solutions businesses for £100m and expects to make other disposals in the future."
"Problems have beset the company in recent years and management are again looking to address the situation."
"We continue to recommend G4S as a ‘hold’ as we can’t see attractions for investors in the short- to medium-term."
Keith Bowman, equity analyst at Hargreaves Lansdown, says that most analysts rate the company as a hold.
He does point out that both Capita and G4S make a lot of play of the potential for them to grow their business in emerging markets in the future, which could make the shares attractive for long-term investors.
Serco was caught up in the tagging scandal earlier this year.
The police are now investigating new allegations that the company’s drivers falsified documents recording when prisoners were delivered to jail in order to meet their targets. The company says it has uncovered no information to confirm these allegations.
Neither Woodford nor Invesco have commented on the news or suggested they will seek to sell.
Companies are required to inform the market if their investors that hold 3 per cent of a company or more break a 1 per cent threshold upward or downward; no such announcement has been made, meaning that Invesco’s 12 per cent slice of the company remains intact.
Bowman says that investors who are minded to buy and sell stocks because of the actions of star managers could be playing a risky game.
"You have to look at it in a broad context of the manager’s strategy," he said. "It’s probably a bit dangerous to read too much in to a manager’s position in an individual stock."
Invesco Perpetual Income has made 19.75 per cent over one year and Invesco Perpetual High Income 19.61 per cent, compared with 16.33 per cent for the average fund in the sector and 13.54 per cent for the FTSE All Share, according to data from FE Analytics.
Performance of funds vs sector and index in 2013
Source: FE Analytics
Both are available with a minimum initial investment of £500 and have ongoing charges of 1.68 and 1.69 per cent respectively.
