It was one of Neil Woodford’s signature big sector calls. While the high-yielding banks were a staple of equity income funds in the mid-Noughties, Woodford saw the credit-fuelled writing on the wall. He was out of the sector when the financial tsunami struck in 2008/9.
Now, he’s back in for the first time in a decade, singing the praises of FTSE 100 titan HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US).
CF Woodford Equity Income Fund
Woodford has lost no time in setting up his own asset management business since leaving Invesco Perpetual after a quarter of a century — with a stunning track record for investors in Invesco’s Income and High Income funds.
Ahead of the launch of his new CF Woodford Equity Income Fund on 2 June, the master investor has been on a two-week roadshow, talking about everything from the global macro-picture to individual stocks.
HSBC
The big surprise is that Woodford is now keen on HSBC. In fact, he invested in the bank last summer. Not for Invesco’s flagship funds, but for a little-scrutinised fund for wealth manager St. James’s Place, the mandate for which he continues to hold.
Woodford didn’t buy enough HSBC shares to make the fund’s top 10 holdings — his initial tranche of shares was just 0.6% of the portfolio — but he says he’s recently ramped up the stake to 2%.
So, why has the City wizard decided to back HSBC. Well, last summer when scotching claims by the Daily Mail that he was about to buy into Lloyds Banking, Woodford described HSBC as “an investable asset”. He said:
“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”.
Clearly, having pumped money into HSBC, Woodford is comfortable with those risks.
The price is right
What about valuation? What Investment quoted Woodford from the recent roadshow:
“HSBC has the capacity to build up its capital base, but also to pay, sustain and grow its dividends. But HSBC on some measures is rated worse now than it was at the height of the financial crisis – that is how cheap it is. The management get it, they have learned from the mistakes of the past”.
When Woodford was buying HSBC for the St. James’s Place fund last year the shares were above 660p throughout the period (and 760p at the top of the range).
At the time of writing, you can pick the shares up for 630p. You’ll be paying a modest 11.5 times current-year forecast earnings, with a juicy 5% prospective dividend. That looks highly attractive to me, even without knowing that one of the shrewdest investors around has made HSBC his first bank bet in 10 years.