Each month, we look at the economic and investment world from a different view point…
June 2014: Neil Woodford from Woodford Investment Management
Old and New
Neil Woodford’s valuation-oriented investment approach has consistently delivered outstanding performance over more than a quarter of a century. With the launch of his new venture Woodford Investment Management (WIM), the UK fund manager will continue to offer his long-term investment approach that has brought impressive returns over the decades. Woodford, who manages the UK Equity and Income Distribution funds and the UK High Income Unit Trust for St. James’s Place, says it is “business as usual but in a new framework”. Speaking with St. James’s Place chief investment officer Chris Ralph, WIM’s founder and head of investment talks about some of the opportunities and challenges that face UK equities.
Chris Ralph: What is your view of Pfizer’s approach to AstraZeneca?
Neil Woodford: My AstraZeneca position was built over quite a long period of time and I have held a big position in that stock for some years. It was also controversial because the pharmaceutical sector was out of favour. I believe I had some role to play in the change in leadership that took place at AstraZeneca two years ago, which was important in terms of the scope to create value. The business was fundamentally undervalued and the market undervalued the pipeline of drugs in development in the business.
My view remains that AstraZeneca has a much better future as an independent entity. I’ve been a vocal supporter of the management who have done a fantastic job and believe they will do an even better job in the future.
Chris Ralph: Do you see Pfizer’s approach as a precursor to other corporate activity in the sector?
Neil Woodford: GlaxoSmithKline’s (GSK) deal with Novartis was extremely good news for shareholders. GSK sold their oncology business for $16 billion, and entered a joint venture with Novartis’s over-the-counter business – and bought the Novartis vaccines business, which significantly improved the quality of the GSK portfolio. I don’t think GSK will pursue any big merger and acquisition activity, and I certainly don’t think anybody’s going to buy GSK. I think there will be more consolidation activity in the pharmaceutical sector, but, as far as the UK is concerned, I think that the AstraZeneca bid is a one-off.
Chris Ralph: You claim that pharmaceutical research is more about biology than chemistry. What opportunities does that offer?
Neil Woodford: I’m not a biologist or a medic. I’m a fund manager. But the problem that the market had was the view that the research anddevelopment(R&D) modelwas broken. There was a ten-year dip in productivity that coincided with a significant leap in the industry’s understanding of disease and the human body, following the decoding of the human genome and advances in the understanding of proteins, genes and biology. I’m not saying chemistry’s no longer relevant. It is, of course, relevant to the development of new drugs. But a whole new area of research was opened up in the last ten years.
AstraZeneca’s immuno-oncology drugs reflect this revolution in understanding. Oncology drugs are about harnessing the body’s immune system to fight cancer in a way that’s not really been understood before, which explains some of the transformation in R&D productivity. The market, which is orientated towards the short-term, misunderstood this development. The R&D model was not broken, but was just changing. I think that the next five to ten years will be a much more productive decade for pharmaceutical R&D. I think the future’s very bright.
Chris Ralph: You avoid banking shares. Are we getting to the stage where some opportunities are emerging?
Neil Woodford: Yes, there are some opportunities, but, perhaps, not where people might think.The portfolio has a relatively small 2% position in HSBC, which I think is a well-run business with a very attractive portfolio of global assets. It’s very profitable and is well capitalised with an attractive dividend yield that will grow over time. It’s quite different from the domestic players, like Lloyds, Royal Bank of Scotland and Barclays. So I do have a position in the sector. HSBC is a well-managed bank and an incredibly strong business, but its shares have performed very poorly over the last 12 months.
Chris Ralph: You’ve reduced your position in utilities. Does the sector still offer opportunities?
Neil Woodford: Undervaluation anomalies that I saw in the past are not there in the regulated water sector and National Grid. But there are attractive opportunities elsewhere in the utilities sector. I own Centrica and Drax, which are not really regulated businesses (although they bump into regulation). There are opportunities, but less than in the past. Recent political intervention, particularly relating to retail energy prices, has been ill-thought-out, and resulted in the industry not investing in new capacity. A cold period could bring capacity problems. This would not be good news for the economy.
Chris Ralph: You’ve been bearish about the prospects for the UK economy. Has your view changed at all?
Neil Woodford: I’ve been cautious rather than bearish. But many of the issues that relate to the fundamentals of the economy remain unresolved, including the leveraging of the consumer economy and the balance of payments. There is no evidence of a rebalancing in the UK economy. The economy has performed better than I would have expected, but the recovery has been a product of a higher level of government spending than was forecast. It is clear that quantitative easing has had a beneficial impact on the economy. But I think we face a less benign public spending backdrop over the next 12 months.
Internationally, it’s hard to see any growth bright spots. Growth in the emerging world looks to be slowing, particularly in China.The US recovery has been reasonably robust, but the fundamentals do not look like they can generate a rapid acceleration in growth. I am concerned that expectations have run ahead of events, particularly in continental Europe. I think the UK economy can continue to grow, but I do not believe that it will accelerate in the way that the consensus believes. I think it is right to remain cautious. Many of the problems in the UK economy are still unresolved.
Points and views
- Woodford believes that in recent years the market has “fundamentally undervalued” AstraZeneca and, in particular, its pipeline of drugs in development.
- A vocal supporter of AstraZeneca’s current management,Woodford says it has done a “fantastic job” and “will do an even better job in the future”.
- GlaxoSmithKline’s deal with Novartis was “extremely good news for shareholders”, but he does not expect the UK pharmaceutical group to pursue M&A activity or become a takeover target.
- There are still attractive opportunities in the utilities sector, says Woodford, who owns Centrica and Drax.
- Woodford holds a 2% position in HSBC, which he describes as a “well-run business with a very attractive portfolio of global assets”.
- With no evidence of a rebalancing in the UK economy,Woodford believes that the UK economy still faces unresolved issues.
- Although the US recovery has been reasonably robust, he believes that “the fundamentals do not look like they can generate a rapid acceleration in growth”.
- Woodford’s major macroeconomic concern is that market expectations have “run ahead of events”, particularly in continental Europe.
The opinions expressed are those of Neil Woodford and are subject to market or economic changes. This article is not a recommendation, or intended to be relied upon as a forecast, research or advice.
The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations.
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