Market News

Woodford Sells Glaxo, Buys Lloyds

May 12, 2017

Star fund manager Neil Woodford has sold out of GlaxoSmithKline (GSK) in his flagship fund Woodford Equity Income and bought into Lloyds Bank (LLOY), and housebuilders Barratt Developments (BDEV) and Taylor Wimpey (TW.).

Other additions to the portfolio include Forterra, a UK brick manufacturer, student accommodation developer, Watkin Jones, construction materials businesses Eurocell and Topps Tiles, real estate businesses British Land, Hansteen, Londonmetric and Sirius Real Estate, technology service companies Softcat and Micro Focus and retailer Card Factory.

As well as selling his stake in Glaxo, Woodford has taken profits from British American Tobacco (BATS) and used inflows to fund the new stock purchases.

Lloyds is Woodford’s first foray back into banks after a disappointing investment in HSBC (HSBA) which he sold in 2014 after holding it for less than 18 months. Before the HSBC investment, Woodford had not bought banking shares for more than a decade.

Speaking in his latest video report to investors Woodford says that the market has become too cautious about rising inflation and about broad economic activity in the UK, and that the credit environment has begun to normalise.

“The banks are now broadly repaired in the UK. They will continue to rebuild capital. But now they are lending to the economy particularly to the SME business sector which is the first time really since the financial crisis that credit has flowed to the economy at an acceptable price and that’s an important new and positive dynamic for the UK economy,” he says. “When you ally that to this bearish consensus having played out in the rating of domestic cyclicals shares, that of course has created an opportunity.”

Mitchell Fraser-Jones, head of investment communications at Woodford Investment Management, added: “I have often heard Neil say that banks should be viewed as warrants on economic growth. Banks play a pivotal role in the economy through the creation of credit.

“When a banking system is functioning normally, credit creation fuels economic growth and the central bank monitors and influences the quantity of credit being created by adjusting base interest rates, as a tool for managing the economic cycle. In a benign economic environment, banks therefore offer leveraged exposure to economic growth.”

The team consider Lloyds to be a well-managed bank with a conservative approach to its balance sheet, with an attractive valuation and potential to up the dividend.

Lloyds a Popular Choice

Woodford is not the only star fund manager to speak highly of Lloyds in recent weeks. Old Mutual Global Investors head of UK equities and chief executive Richard Buxton is bullish on banks, saying that they have taken their medicine and emerged from the credit crisis as good, cheap businesses.

“Lloyds is my favourite UK bank, on our calculations soon it will be paying a 6p dividend on a stock worth 64p. That is a 10% yield. That is unsustainable so you will get a re-rating of the share price,” he said. “Lloyds offers income and growth.”

Buxton considers Barclays to be undervalued, and says that HSBC is trading at fair value but is well positioned to benefit from rising US interest rates because of its global business model.

Source: Morningstar. Emma Wall | 12/05/2017

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