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Woodford adds to early-stage businesses amid turbulence and dividend cuts

Neil Woodford is using market volatility as an opportunity to increase exposure to quoted early-stage businesses
Woodford adds to early-stage businesses amid turbulence and dividend cuts

It is nearly two years since star manager Neil Woodford's high-profile departure from asset manager Invesco Perpetual, after which he set up his own business, Woodford Investment Management. Since then he has launched two funds, starting with CF Woodford Equity Income (GB00BLRZQB71) in 2014 which flew off the shelves and has now grown to more than £8bn in size.

Woodford Patient Capital Trust (WCPT), meanwhile, was the largest ever UK-domiciled investment company raising, at £800m. This also proved very popular and moved to a high premium to net asset value, but has since moved down to around par amid market turbulence. This investment trust has about 60 per cent of its portfolio in life sciences, and about 60 per cent of the trust's assets are quoted.

Meanwhile one of its holdings, US-listed Northwest Biotherapeutics, has been the subject of unattributed reports criticising the company on a number of issues.

Mr Woodford believes the economic and equity market environment is challenging, but is still upbeat on the long-term prospects for what he invests in.

"As valuations have been pushed up so investor expectations have had to be fulfilled with better earnings growth, cash flow and dividend growth, and in a weakening global growth environment that is not possible," he says. "But having said all of that the reason I am a fully invested fund manager is because I believe there is a subset of the market that can deliver attractive returns in this really challenging economic and financial market environment. And we have positioned the portfolio in assets we think can deliver high-single-digit returns over a three- to five-year view."

Going ahead he expects more dividend cuts by UK companies, partly because of commodity price weakness resulting from the underlying weakness of the Chinese economy. "I expect a global weakness in demand, not just China, to now manifest in collapsing profitability, earnings and cash flow, which will result in significant dividend cuts across the market," he says. "We are seeing that almost on a daily basis and I think we will see more of it.

The three stocks that I think are profoundly important from a dividend perspective which are paying unsustainable dividends in my view, are Shell (RDSB), BP (BP.) and HSBC (HSBA)."

None of these are portfolio holdings, however. But another company he holds in CF Woodford Equity Income, and thinks is overdistributing and will have to cut its dividend, is GlaxoSmithKline (GSK). He continues to hold it because "we think value can emerge if the business pursues different strategies".


Neil Woodford CV

Neil Woodford is head of investment at Woodford Investment Management. Before this he spent 26 years at Invesco Perpetual, latterly as head of UK equities and manager of funds including Invesco Perpetual Income, High Income (GB00BJ04HQ93) and Edinburgh Investment Trust (EDIN).

He has also worked at Eagle Star, Dominion Insurance and Reed Pension Fund.

Mr Woodford has a degree in economics from Exeter University.


Mr Woodford is going to use the volatility to sell out of some listed large-caps in Woodford Patient Capital Trust in favour of earlier-stage businesses.

"The cost structure of [Woodford Patient Capital] has turned out to be lower than we anticipated, and we think given the attractiveness of the opportunities in early-stage businesses, and as many of the quoted ones have been significantly impacted [by the market volatility], frankly it's rather anomalous to have holdings in companies such as AstraZeneca (AZN), GlaxoSmithKline and Legal & General (LGEN) . It probably makes sense to redeploy that capital in some of these early-stage businesses and that's what we are going to do."

The running costs of Woodford Patient Capital were being covered by dividend income from mature dividend-paying businesses, as this trust does not charge a fee unless it delivers a cumulative annual return in excess of 10 per cent.

Additions include Prothena (US:PRTA) "one of our favourite holdings we've added significantly to and will continue adding to". He will also add "where we have the ammunition and can take advantage of it".


No Brexit concerns

A challenge he does not seem too concerned about is possible market volatility as a result of the referendum on leaving the eurozone this summer, and a possible vote in favour of leaving. He does not believe that whether we stay in or leave will influence the overall course of the UK economy and with regard to the market, says: "I've never believed that it was appropriate to manage a portfolio with a view on short-term volatility: it's my job to manage through this. If the impact on the economy is likely to be pretty neutral whether we stay or leave, you can imagine that it's not going to substantially affect the strategy of the portfolio.

"There are going to be some industries that we think will benefit and some that we think will suffer. I think the City will be disadvantaged by a Brexit, but of course it is likely that the currency will depreciate further if we do leave, and consequently it is likely some other industries may benefit from a weaker pound. So we need to factor that into our judgments about what we have got in the portfolio, where we are positioned and which companies we are happy with.

"I don't think it is enough to change anything in the portfolio and we will just navigate our way through short-term volatility."