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Woodford: The UK gives me all the diversification I need

13 November 2015

Star manager Neil Woodford explains why having to invest a majority of his portfolios in UK assets doesn’t restrict him as an investor and is actually an advantage.

By Lauren Mason,

Reporter, FE Trustnet

Sticking to investing mostly in the UK provides more benefits than it does restrictions, according to Neil Woodford (pictured).

The star manager is renowned for having a significant proportion of his assets outside of the UK market. For example, he currently runs the SJP UK High IncomeCF Woodford Equity Income and the Woodford Patient Capital trust, which on average have around 15 per cent of their assets in non-FTSE listed companies. 

Many investors choose global funds for their regional diversification, which they believe provides greater downside protection in the case of any unexpected macroeconomic events.

However, according to research conducted using FE Analytics, a vast majority of funds in the IA Global Equity sector have underperformed the MSCI AC World index over one, three, five, 10 and even 20 years, despite managers having the whole world to choose from for opportunities.

Sector vs benchmark over 5yrs

Source: FE Analytics

In an article published earlier this year, Hargreaves Lansdown’s Laith Khalaf told FE Trustnet that one of the reasons the global sector has underperformed is because of its home bias towards the UK, while the MSCI AC World index is heavily weighted towards the US.

“Over periods when the US is doing well, particularly recently, you’ll tend to find that the sector lags behind the benchmark because its geographical allocation is more weighted towards the UK – Conversely, if the UK is outperforming then I would expect it to do a bit better.” he said.

Woodford believes that the investment universe of global stock markets is unmanageable and as such, doesn’t mind being compelled to invest in one area.

This is despite believing that portfolio constraints should usually be kept to a minimum, as he says that even the UK stock market has a vast amount of assets to choose from.

“Filtering and screening techniques are required to bring the [global] investment universe down to a more practical size,” the manager said.

“I have always been against using this sort of filtering process, because it necessarily relies on quantitative data and can prevent you from becoming aware of investment opportunities which may look extremely attractive on any other measure.”

Another reason that he likes having to invest mostly in the UK is that, put simply, he considers himself to be a genuine UK investor. Since the manager started running funds in 1988 after launching Invesco Perpetual High Income, he has invested in the UK stock market.

“Whether it’s revisiting old ideas, previously quoted companies coming back to the market or management teams I’ve backed before in new settings, the bank of knowledge on which I can draw is an incredibly valuable resource. Experience counts in this profession,” he continued.

A further argument that many fund managers give for owning a portfolio of UK stocks is the global diversification it offers along with sound corporate governance, instantaneous currency hedging and easy access to company management teams.


According to research from Woodford Investment Management, the CF Woodford Equity Income fund has a 41.9 per cent geographic exposure to the UK, 16 per cent exposure to Europe, 25 per cent to North America and 9.3 per cent to Asia including Japan.

Geographic exposure in CF Woodford Equity Income

Source: CF Woodford

“The UK stock market is home to some very large, globally-diversified businesses, some of which barely touch the UK economy at all,” Woodford explained.

“We recently conducted some analysis to calculate the CF Woodford Equity Income Fund’s geographic exposure by the revenues of the underlying companies into which it has invested. This isn’t as easy as it sounds – every company reports geographic revenues in its own way and simplifying all of the variations involved some painstaking analysis.”

While small and mid-caps have greater exposure to their domestic market, large and mega-caps are often highly global, and seven of CF Woodford Equity Income’s top 10 holdings are constituents of the FTSE 100 index.

The fund also has a 10.99 per cent weighting in the US, 3.39 per cent in Switzerland, 0.82 per cent in Ireland and 0.35 per cent in Norway.

“The fund has a healthy revenue exposure to the US economy, which has of course been performing much better than most other economies in the recent past and we would expect that to continue, albeit with potentially a more modest growth rate going forward,” Woodford said.

Performance of indices over 3yrs

Source: FE Analytics

“The fund also has a reasonable exposure to Europe and emerging markets, which implies a much greater level of geographic diversification than the country of listing would suggest.”

The manager says that while the growth prospects for these regions may look unstable on a top-down basis, the fund house’s strategy is to focus on individual business that don’t depend on an upmarket to deliver sustainable growth.

Despite the fund’s geographic diversification, this investment technique has led to the fund’s portfolio actually having more of a UK exposure than its FTSE All Share index, which has between a 25 to 35 per cent exposure according to analyst estimates.

A big reason for this, according to Woodford, is the lack of exposure to the oil & gas and mining sectors, which constitute a large part of the index and are global-facing.


Currently, CF Woodford Equity Income’s largest sector weighting is health care which accounts for almost a third of the fund’s portfolio, followed by a 20.96 per cent weighting in financials, 18.7 per cent in consumer products and 14.92 per cent in industrials.

The fund also has smaller weightings in the telecom, media & technology, services, utilities and basic materials sectors.

“In general, the ‘less constraints = more opportunity’ mantra is very important. I will always consider myself as a UK fund manager but equally, I am delighted to have the scope to invest overseas where my knowledge of UK businesses lends itself to an overseas context,” Woodford said.

“For example, tobacco and health care are globally consolidated industries where individual companies can have strong similarities and be exposed to the same broad influences. Hence, we have been able to build greater exposure to these industries by investing in attractive overseas businesses than a UK-only mandate would have been able to. This additional flexibility is welcome and will, I believe, add considerable long-term value.”

Since its launch in June 2014, CF Woodford Equity Income has returned 21.63 per cent, outperforming its sector average and benchmark by 17.06 and 24.29 per cent respectively.

Performance of fund vs sector and benchmark since launch

Source: FE Analytics

The fund has a clean ongoing charges figure of 0.75 per cent and yields 4 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.