Ace fund manager Neil Woodford has hammered the market over a quarter of a century. Much of his success has come from seeing ‘the big picture’ — and pumping money into sectors that have delivered juicy returns, while avoiding those that have underperformed.
Stephen Lamacraft, a member of Woodford’s team, has recently penned an article that reveals one big-picture driver for the current positioning of the CF Woodford Equity Income fund.
Three companies the fund has backed to benefit from this driver are AstraZeneca (LSE: AZN) (NYSE: AZN.US), Smith & Nephew (LSE: SN) (NYSE: SNN.US) and Capita (LSE: CPI).
The silver age
Lamacraft writes that “with its population ageing rapidly, the world is entering a ‘silver age'”. He notes that this trend presents long-term challenges for policy-makers, but also opportunities for investors, “with older people spending considerably more money on healthcare”.
AstraZeneca
A whopping 30% of the CF Woodford Equity Income fund is invested in the healthcare sector. Woodford’s biggest single holding in the sector — in fact, the fund’s number one holding outright — is pharmaceuticals firm AstraZeneca, with a hefty weighting of 8%.
AstraZeneca’s shares are currently trading at around £44, putting the company on what looks, on the face of it, a pricey forward P/E of 17.5. However, Woodford puts a much higher valuation on the company. He was happy to see AstraZeneca reject a £55-a-share takeover bid from US giant Pfizer in May, arguing the bid undervalued the strength of Footsie firm’s drugs pipeline.
Smith & Nephew
Outside of drugs companies, Woodford’s biggest healthcare bet is Smith & Nephew, a medical devices firm, best known for hip-replacement products. Clearly, the market for the treatment of hip arthritis and hip injury — as well as the company’s other areas, which include knee and shoulder treatments — is going to grow with ageing populations.
Smith & Nephew’s shares have been trading at over £10 in recent months, and as high as £11. Again, this company’s shares look pricey on a P/E valuation: about 18. Nevertheless, Woodford has been happy to invest on this kind of rating.
Capita
Lamacraft also highlights in his article more oblique opportunities that flow from an ageing population, noting that this demographic trend will increase the already considerable strain on government budgets. He sees this as a growth driver for private-sector outsourced solutions: “This is positive for companies such as Capita which offer solutions which can deliver a better service at a much lower cost than the civil service has been able to”.
Capita is the sixth-largest holding of the CF Woodford Equity Income fund. Once again, this company looks on the pricey side on a conventional P/E of 17 at a recent share price of around £11.50. But, once again, Woodford has been happy to buy.