Speculation swirled last week that the manager could be considering dipping his toe back into the sector with the sale of the first tranche of the state’s holding in the bank, expected this autumn.
However, Woodford has denied any such intention and says that he still expects a gloomy future for the sector, with too much uncertainty to invest. "Reports of my imminent return to the banking sector through a purchase of some of the Government’s stake in Lloyds are not correct," he said.
"I have absolutely no intention of buying a stake in Lloyds or any other UK-focused high street bank at the present time and don’t expect to do so for some time."
"This is because I cannot quantify the risk of dilution through future capital raisings and remain concerned about the extent of loan losses sitting in these banks’ balance sheets, awaiting recognition in the coming years as and when they have enough capital to absorb them."
Lloyds has been a star performer on the FTSE over the past 18 months and shares have risen from 25p in April last year to 67.73p today – a gain of 167.81 per cent, according to data from FE Analytics.
Performance of stock over 2yrs
Source: FE Analytics
The prospect of the Government’s share being sold off has helped to support its price in recent weeks, even as the wider market has suffered, with many investors believing the stock’s run has further to go.
Other investors have bought Lloyds in anticipation of the bank reinstating its dividend.
Chief executive Antonio Horta-Osorio has said he intends for the bank to be a high dividend-paying stock again in the future, and some media reports have suggested it could begin returning cash to shareholders in the 2014 financial year.
Schroders' Nick Kirrage and Kevin Murphy have recently told FE Trustnet that they have bought Lloyds for their Schroder Income fund partly in anticipation of a dividend.
However, Woodford thinks there are still losses to be booked, which makes shareholder payouts less likely.
"This process of loss recognition still has several years to run, in my view, and the prospect of dividends from the likes of Lloyds during this process is remote," he said.
The manager has a more favourable view of at least one UK bank: HSBC, he says, was better-governed than Lloyds before the financial crisis.
"Some banks have made better progress in clearing up their balance sheets, having not participated as fully in the excesses that led to the financial crisis."
"HSBC, for example, is an investable asset in my opinion. The investment decision here is more a question of valuation and, with a significant exposure to Asia, being comfortable about the risks associated with the slowdown in activity that is now evident in that region, China in particular."
"The differences, however, between the conservatively managed, well-capitalised HSBC, and Lloyds, are stark."
Woodford’s scepticism about the banking sector has served him well in the past. The manager steered clear of it in the run-up to the financial crash, which helped him outperform during the market sell-off.
His £13.9bn Invesco Perpetual High Income and £10.6bn Invesco Perpetual Income funds both outperformed in 2008, partly because they did not hold banks.
Data from FE Analytics shows the funds lost 19.42 and 19.94 per cent respectively, while the average IMA UK Equity Income fund was down 28.54 per cent.
Performance of funds vs sector and index in 2008
Source: FE Analytics
Despite his positive view on HSBC, Woodford does not hold the bank in either of his equity income funds.
It is held by 26 other IMA UK Equity Income funds, including the five crown-rated Trojan Income, CF Olim UK Equity, Cazenove UK Equity Income and Threadneedle UK Monthly Income funds.
BlackRock UK Income has 9.1 per cent in the company, while R&M UK Equity Income and JOHCM UK Equity Income have 7.7 per cent.
Woodford’s funds have slightly lagged the sector over the past 12 months, as the whole UK stock market has been buoyant, even more so in the case of cyclical or aggressive stocks.
While the sector has made 26.66 per cent, Invesco Perpetual Income has made 24.46 per cent and Invesco Perpetual High Income 24.09 per cent, according to FE Analytics data.
His caution has served him well in the long-run, however, with the High Income fund first in the sector over 10 years and the Income fund second.
Woodford has been happy to underperform over limited periods in the past while the competition chased better short-term returns.
Over the past three years both funds remain top-quartile performers, with the High Income fund up 57.3 per cent and the Income fund 56.33 per cent.
Performance of funds vs sector and benchmark over 3yrs
Source: FE Analytics
The sector has made 49.31 per cent in that time and the FTSE All Share 44.26 per cent, according to data from FE Analytics.
Both funds require minimum initial investments of £500, and while the Income fund has ongoing charges of 1.68 per cent, the figure for the High Income fund is 1.69 per cent.
