What I Just Can’t Understand About Neil Woodford

Let me start by saying I’m not here to knock Neil Woodford.
 
That’s because — as I’m sure many of you would agree — the chap is a true investing superstar.
 
I’m mean, his track record is pretty much untouchable among current City fund managers. During the last 25 years, he’s turned £10,000 into £230,000-plus and completely trounced the FTSE 100.
 
I bet few of us mortals have come anywhere close to matching that…
 
…let alone could deliver the same record in a proper public fund with all the regulations that go with it.

That said, I doubt many of us would invest the Neil Woodford way

As you must know by now, Neil Woodford left Invesco Perpetual earlier this year to set up his own company and start a new fund.
 
Famed for delivering superb returns from large-cap dividend shares, Mr Woodford had no trouble raising £1.6bn from fans wanting long-term outperformance alongside a decent yield.
 
And this week, we all enjoyed the first glimpse of where exactly all that money had been invested.
 
Given Mr Woodford was starting from a clean slate, his portfolio certainly surprised me. I doubt many of us would invest in exactly the same way.

30 shares out of 61 each represent less than 1% of the portfolio

True, topping Mr Woodford’s funds were his long-standing favourites from the pharmaceutical, tobacco and telecoms industries.
 
Indeed, AstraZeneca (8.3%), GlaxoSmithKline (7.1%), British American Tobacco (6.2%), BT (6.0%), Imperial Tobacco (5.3%), Roche (3.9%) and Reynolds American (3.6%) all combine to represent about 40% of his new fund.
 
But the rest of Mr Woodford’s fund then quickly tails off into a collection of much smaller holdings.
 
You see, Mr Woodford’s new fund has 61 companies and only his top ten boast weightings of 3% or more. The rest of the portfolio breaks down like this:

• 7 shares each representing between 2% and 3% of the fund;
• 14 shares each representing between 1% and 2% of the fund, and;
• 30 shares each representing less than 1% of the fund.

I must admit, it’s not exactly high conviction stuff among the lower order.
 
And yet… some of the companies further down the weightings are in fact quality operators.
 
Novartis at 2.0%, SSE at 1.8%, Reckitt Benckiser at 1.8%, Next at 1.7% and Smith & Nephew at 1.3% — I simply can’t fathom why Mr Woodford has weighted such blue-chip names so lowly.

He could score a 100-bagger and it would not make the slightest difference

Run down the rest of the running order and we find Meggitt, Cobham, Catlin and Paypoint each representing between 0.25% and 1%.
 
Then there’s Homeserve, Stobart and Cranswick, which represent a miniscule 0.09%, 0.03% and 0.01% respectively.
 
These are all established companies in the FTSE 250, and yet Mr Woodford’s allocations amount to hardly anything.
 
Indeed, to put Paypoint and Cranswick’s weightings into perspective, 0.25% of a £1m portfolio is £2,500, while 0.01% is just £100.
 
The obvious question is — why bother with such small holdings? I just don’t understand.
 
Cranswick for example will need to 100-bag just to get to a 1% weighting, and its effect on the overall portfolio even from then would be minimal.
 
Solid though as Mr Woodford’s mid-cap faves may be, I just can’t see them ever becoming anything other than token gestures in the wider fund. It simply seems pointless holding them.

Does anybody buying in really care about the blue-sky stuff?

One fascinating feature of Mr Woodford is his liking for smaller, blue-sky stocks.
 
e-Therapeutics, Vernalis, ReNeuron, 4D Pharma and Revolymer are just some of the obscure names currently trying to reach breakeven and hit the big time for the great man.
 
When launching his fund, Mr Woodford claimed he invested in such stocks because the UK had a great record of innovation and ‘blue-sky’ valuations were attractive because other City managers generally overlooked the upside possibilities.
 
Which is all fair enough, but I doubt very much whether most people backing the new fund know — or even care — these blue-sky shares exist in the portfolio.
 
Instead, I dare say many clients would prefer the fund held more in the way of traditional large-cap income shares. After all, that’s what Mr Woodford is renowned for buying and on which the vast majority of his success has been based upon.

I could have invested if he didn’t have such a mixed portfolio

As I say, I am not sure many of us would invest in exactly the same way as Neil Woodford.
 
Speaking for myself, I would never bother with so many small investments that will have next-to-no bearing on my total performance…even if they jump 5-fold, 10-fold, 20-fold or more.
 
And I dare say few of us would ever invest a large lump sum in individual shares all in one go — as Mr Woodford has essentially done with that £1.6bn he’s just been handed. Holding a bit of cash back, just in case, can often prove prudent.
 
All told, I think Mr Woodford’s new set-up has missed a trick here — I just don’t understand why he did not go for two funds:

• The first representing the traditional income portfolio with all the FTSE 350 names, and;
• The second to house the collection of blue-sky names.

You see, devout Woodford fans would still buy into either or both of the funds…
 
…while I am sure he would find a few more investors going for the blue-sky opportunity who would never normally touch a popular income fund. I’d certainly consider any Woodford ‘high growth’ portfolio.