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Invesco Perpetual fund manager Neil Woodford is currently managing the most ‘concentrated’ portfolio of holdings since he joined the company in 1988, reflecting his conviction in the stocks the fund invests in.
For several months now Woodford has reiterated a similar theme – this is an excellent opportunity for equity investments. The amount at which the shares of some companies are valued means they are relatively cheap but have growth potential in the current climate.
The valuations applied to individual companies have become irrelevant in the market, in Woodford’s view, in what has been a momentum-driven equity market. However, ‘valuation is like gravity...it has a habit of reasserting itself.’
“In March 2008 the world changed...the valuations people had been allocating to stocks became untenable.”
For that reason he believes the current business cycle is not a normal period of recovery, citing investors’ faith in uninterrupted economic growth in China as a driver for the momentum in stock markets.
For Woodford the conditions in the domestic market are challenging as economic growth is weak, opting for companies with exposure to overseas markets, while he also believes emerging markets currently grappling with inflation, including China, could see problems.
Coming back to valuations
The Income Fund, managed by Woodford, was in the top quarter of funds in its sector over the last three months and he said recently that he detected a positive change in attitudes towards some of the companies he holds, such as pharmaceutical firms.
At the moment 50 per cent of the fund’s holdings are concentrated in just ten companies, including large pharmaceutical companies like AstraZeneca, tobacco firms such as Reynolds American and the oil and gas company BG Group.
This reflects the fact that Woodford sees the share price of many companies as undervalued and has viewed the current period as a buying opportunity for those shares.
Some controversy surrounded a stake Woodford made in a vehicle which will enter joint ventures or make investments in Zimbabwe.
Woodford said the investment was not attached to the political regime in the country, while Zimbabwe had high literacy rates providing potential for growth from human resources, as well as from the country’s natural resources.
His funds have also invested in other areas like litigation finance (taking relatively small stakes in the context of the funds Woodford’s team manage) in companies listed on the UK Alternative Investment Market (AIM) which provide finance for legal cases.
Is the fund too big?
The Income Fund is approximately £8.3billion in size. As such a large fund, is it unwieldy and does it create constraints?
No, is Woodford’s view. “The portfolio reflects where I see opportunities in the market and I have the flexibility to go where I see the opportunities,” Woodford says.
So, while his funds currently have a relatively small group of holdings, in the past funds have held over 130 stocks.
The flexibility to invest in the domestic market, in large FTSE 100 companies, smaller companies listed on the AIM index or unlisted securities, as well as globally – the Income Fund currently has holdings in Switzerland and the US – means the current size of the fund does not restrict its investment universe.
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