The portfolio’s new holdings, as well as several companies recently sold by Woodford, signal for the first time the manager’s ongoing investment strategy for his new business since the fund’s release of its initial 61 full holdings last month.Woodford has participated in the recent flotation of two newly listed companies; biotech specialists Abzena, listed on the AIM index, and private healthcare provider Spire Healthcare, which is listed on the FTSE 250.
The manager, notoriously ultra-long-term in his approach, has also sold out of two of his larger holdings – Novartis and Altria, which made up 2.01 per cent and 1.3 per cent of the portfolio respectively.
He also sold outsourcing firm Serco, which made up 0.59 per cent.
Royal Mail had an initially strong run following its floatation on the stock market in October 2013 amid political contention the stock had been sold at unduly low price to its true value.
However, according to FE Analytics, the contentious stock has had a torrid ride in 2014, losing almost 25 per cent since the beginning of 2014. Since its initial public offering last year, Royal Mail is down 5.07 per cent whilst the FTSE All Share has risen 5.45 per cent.
Performance of stock and index since Oct 2013
Source: FE Analytics
Reaching a lower valuation was the primary reason to move on the stock, according to the latest fund update from Woodford Investment Management.
“This is fundamentally a very attractive, cash generative business. It has its challenges, not least the competitive threat in profitable, densely populated areas,” the firm said.
“But it has its opportunities too, such as slowly working to bring its cost base into line with its competitors. Royal Mail has an operating margin of 4.6 per cent compared to 8 to 10 per cent for most of its peers.”
“We have been impressed by the management team and believe it is well-placed to capitalise on the long-term opportunity to deliver a better service to its customers and generate sustainable shareholder value.”
Woodford’s addition of Royal Mail to the £2.4bn CF Woodford Income fund is the largest new holding, making up 1.5 per cent of the portfolio.
No IMA funds currently hold it in their top-10.
The manager also scooped up several new holdings in July including the private equity group Oakley Capital and Raven Russia, which buys and rents commercial property in Russia.
Again, no IMA funds hold either in their top-10.
Oakley Capital initially provided the infrastructure for Woodford Investment Management in the early months after the manager left Invesco.
He formerly held Raven Russia – an investment trust – at Invesco. It has had a similarly bad 2014 to Royal Mail, losing almost 14 per cent of its value. Rising geopolitical tension over Russia’s entanglement with Ukraine has had a negative impact on many businesses focused on the Russian market.
In line with Raven Russia’s losses the MSCI Russia has taken a significant hit as the spectre of further and more punitive economic sanctions against Russia has unnerved investors in the country.
Performance of stock and index in 2014
Source: FE Analytics
Despite buying Raven Russia, the update said there is worrying lack of reaction to growing geopolitical risk by investors.
“We have been a bit surprised by the market’s lack of concern about some of the geopolitical events that have been brewing in the background – the unrest in Ukraine, Russia and Israel and Gaza, for example, initially shrugged off by the market, but in recent days the market seems to have become, quite rightly, a bit more concerned,” the firm said.
“These issues are not positive for an already troubled global economic outlook and do not look easy to resolve.”
However, Woodford did shrug off a disappointing performance for the fund’s second largest holding GlaxoSmithKline – which has fallen almost 10 per cent since Woodford launched his new fund.
Woodford is maintaining a high conviction position in GlaxoSmithKline of more than 7 per cent – its second largest, behind only AstraZeneca.
He has been adding to shares in the pharmaceutical giant over the past month, which saw it embroiled in a bribery scandal in China as well as issue a profit warning.
“A long conversation with Glaxo’s chief executive post-results has allowed us to maintain confidence in the long-term investment case, despite this near-term setback,” the update said.
“Glaxo remains a very cash generative business and it is a very cheap share in our view, with a starting yield of 5.5 per cent and the prospect of modest but sustainable long-term dividend growth.”
The move reiterates Woodford’s style whilst at Invesco Perpetual, where he would routinely add to tobacco stock holdings when the prospect of aggressive legislation from the US loomed.
In the fund’s first two months of trading – a short period to judge the performance of such a long-term investment – the CF Woodford Equity Income fund has struggled to generate a positive return from launch; it is currently down 1.55 per cent.
However, it has performed better than the FTSE All Share and the IMA UK Equity Income sector average over the period.
Performance of fund, sector and benchmark since June 2014
Source: FE Analytics
The CF Woodford Income fund has grown to be the fifth largest in the IMA UK Equity Income sector with approximately £2.4bn of assets under management.
The inflows are likely to keep coming as well; a recent poll of more than 2,000 Trustnet readers showed more than a third had already invested in the fund with a further 12 per cent planning to do so in the next six months.
As well as Royal Mail, Raven Russia and Oakley Capital, some of Woodford’s more contrarian positions in the fund include FTSE-AIM listed tech company Imperial Innovations, which is a top-10 holding, and FTSE 250 electrical power company Drax Group.
