I was fascinated to read about Neil Woodford’s buys for his new fund. It’s always fun to compare to notes with the investing greats of our age, such as Woodford and Buffett.
The question I had on my mind was: would Woodford continue with his previous approach of investing in unloved, high-yield blue chips, or would he, as had been suggested, be investing in more volatile but higher-growth small caps?
Reading through the summary of his latest investments, it seems he has chosen a hybrid approach. Many of his biggest investments are identical to what he had invested in at Invesco Perpetual: solid blue chips such as GlaxoSmithKline, AstraZeneca and British-American Tobacco. But, alongside these core investments are many investments in small caps such as Prothena and Imperial Innovations.
Value vs growth
It looks to be a portfolio that is 50% Benjamin Graham, and 50% Peter Lynch. I’ll be interested to see which guru’s approach will do better. I think Neil Woodford would be interested to see, too.
So that’s the big picture; let’s now focus in on the detail. One of Woodford’s key holdings is telecoms and broadcasting company BT (LSE: BT-A) (NYSE: BT.US). I thought I’d analyse why he bought into this company.
A few years ago you would have said that BT was a solid but unspectacular telecoms utility that offered a reasonable dividend yield but wasn’t offering much in the way of growth.
But BT has become, over the past two or three years, a company transformed. Since the Eurozone crisis the share price has doubled. The company has moved with conviction from being a pure telecoms play to a company with an increasingly profitable global services division, a market-leading broadband offer and a growing foothold in pay TV.
Carving out its niche in pay-tv
I think the battle between BT and BSkyB for hegemony in pay-tv is a story that is just beginning. However this plays out, BT’s move has already substantially added value to its shares. As the pay-tv industry — both in the UK and globally — is steadily growing, I suspect both companies will carve out their niches in this field and will in time be strongly profitable.
You could argue that Woodford has bought in too late. After all, the share price has increased so much already. Perhaps the share price is due a breather, if not a correction? But the fundamentals still don’t look expensive, with a 2014 P/E ratio of 15, falling to 13 the following year.
I suspect in the coming months the share price may tread water as investors take profits, but the long-term prospects of this company are strong. The merits of buying into BT are similar to the logic of buying into Vodafone, which Woodford famously invested in at Invesco Perpetual. Both companies are now plays on the synergies between telecoms and broadcasting. This is why Woodford bought BT.