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Woodford’s top-10: How it differs from Invesco Perpetual High Income

07 July 2014

Whitechurch’s Ben Willis says that the smaller size of the new CF Woodford Equity Income fund will allow investors to benefit from the manager's best ideas in the early days.

By Joshua Ausden,

Editor, FE Trustnet

Neil Woodford has retained a high-conviction position in healthcare and tobacco in his newly launched CF Woodford Equity Income fund, with AstraZeneca, GlaxoSmithKline, British American Tobacco and Imperial Tobacco all major holdings.

ALT_TAG Nine of the fund’s top-10 positions were also in Invesco Perpetual High Income’s top-10 when he left the firm in March. The exception is BAE Systems, though the FTSE 100 company is expected to have a sizeable position when the entire portfolio is published early next week.

Imperial Innovations is the new entrant, making up 3.6 per cent of the £1.6bn CF Woodford Equity Income portfolio.

Woodford (pictured) had been a keen admirer of the company while he was at Invesco, which still owns more than 40 per cent of it.

Woodford Investment Management owns around 3 per cent of the company, but because the FE Alpha Manager’s new fund is much smaller than Invesco Perpetual Income and High Income, the stock will contribute more to performance – at least for now.

Only one other fund in the IMA universe – the little-known Sand Aire First Ilona Long Term Cap – also includes the stock in its top-10.

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Source: FE Analytics


As well as the inclusion of Imperial Innovations, the biggest difference between CF Woodford Equity Income today and Invesco Perpetual High Income as at 31 March 2014 is the company weightings.

The Invesco fund was more concentrated when Woodford left than his portfolio is today.

The manager’s top-10 in late March accounted for 56.55 per cent of assets, while CF Woodford’s top-10 today accounts for 44.8 per cent.

BAT, BT and Imperial Tobacco now have a larger weighting, though Astra, Glaxo, Roche, Reynolds American, Rolls Royce and Capita now make up less of the manager’s overall portfolio.

The performance of stocks in the lead-up to Woodford’s departure from Invesco will have affected the final weightings, and Whitechurch’s Ben Willis expects that the new fund will become more concentrated as time goes on.

Woodford himself admits that the fund is a work in progress, though insists he is very happy with it at this point.

“I’ve been using a pilot analogy to explain the process of building the portfolio of my new fund. We have taken off and we have already gained a lot of height, but we are not yet at cruising altitude. The portfolio will continue to evolve,” he said.

Willis points out that Mark Barnett has made Invesco Perp High Income less concentrated since he has taken over, and anticipates CF Woodford Equity Income will be the more concentrated of the two before long.

Invesco Perpetual High Income’s top-10 now accounts for 51.7 per cent of assets.

Some critics suggested that Woodford’s high conviction positions in FTSE 100 giants such as Glaxo and BAT at Invesco was influenced by the manager’s lack of flexibility, given he was running more than £20bn across the Income and High Income funds.

Willis says that his continued preference for these companies, even though he is running a much smaller pot of money, disproves these claims.

That said, looking down at some of the manager’s smaller positions, there are some big differences between CF Woodford Equity Income and the Invesco Perpetual High Income fund at the end of March.


Woodford Investment Management will disclose the full portfolio on a monthly basis and aims to do so for the first time on 14 July. It has already confirmed that Woodford has taken two sizable positions in companies that he didn’t hold in Invesco Perpetual High Income.

“In the run-up to the launch of the fund I said that the new fund will be similar to funds I have run in the past, although there are a couple of stocks that haven’t appeared in my recent portfolios,” Woodford said.

“I have invested in Next, the retailer. It is a stock that I haven’t owned since 1999 and at first glance, this investment decision doesn’t seem to fit comfortably with my cautious outlook for the UK consumer economy.”

“However, it is a great example of how I think a business should operate from the perspective of capital allocation. It has been an outstanding business over the past 10 years despite a very challenging consumer environment, delivering steady growth on a per share basis thanks to a very disciplined share buyback policy.”

Performance of stock and index since Jan 1999

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Source: FE Analytics

“I’ve missed a couple of opportunities to buy into it previously but I believe it can continue to deliver over the next 10 years. It out-competes its nearest rival M&S and has a very successful online business.”

Woodford has also bought into the recent float of AA.

“It is an unbelievably cash-generative business with huge brand recognition and a strong subscription model,” he said.

“It is quite highly indebted, but the new management team has paid down its most expensive debt using some of the money raised in the float and it looks well-placed to deliver steady long-term growth.”

Willis believes that early-bird investors in Woodford’s fund may benefit from his increased flexibility, as well as his eagerness to make a strong start.

He points out that Imperial Innovations will weigh more heavily on performance in the early stages, for example.

“Woodford’s big bets have remained the same, but he was limited to some extent to what he could invest in at Invesco,” he said.

“He has nothing to prove, but he has a great pedigree and will want to make a real mark. Of course this hasn’t always worked out for managers, as seen by Anthony Bolton’s China venture, but in the early stages he will have the opportunity to invest in some of his high-conviction ideas.”

“He has always been a fan of early-stage tech and some other start-ups, so it will be interesting to see how much [of the portfolio they account for.]”

Willis acknowledges that this flexibility may be short-lived, as he expects the fund’s assets to grow considerably from £1.6bn in the coming months.

Although Next does seem to be a direct play on the UK consumer, Woodford says the portfolio more generally reflects his cautious outlook for the UK economy.

“My cautious view on the global economy hasn’t changed. The liquidity flows that have supported asset prices over the past five years are going into reverse, while growth in many parts of the world is being downgraded,” he explained.

“The global economy and financial markets both face a tricky time over the next few years, but there are still many undervalued assets in equity markets and it is these opportunities that the fund is seeking to exploit.”

“I have been very careful in building a portfolio that avoids sectors that I believe are vulnerable to a faltering global economy. There is significant emphasis in my new fund on the tobacco and pharmaceutical sectors.”

“These two sectors are resilient to falling demand, have strong balance sheets and attractive valuations," he added.

It’s very early days, but CF Woodford Equity Income has made a solid start, returning 0.9 per cent – almost exactly the same as the FTSE All Share and IMA UK Equity Income sector average.

More important is the manager’s long-term record – he is one of the best performing UK managers since the turn of the century, significantly outperforming his peer group composite.


Performance of manager and peers since Jan 2000

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Source: FE Analytics

CF Woodford Equity Income has an annual management charge of 0.75 per cent.

The firm will absorb all extra fees, meaning that ongoing charges will always stay at this level.

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