Neil Woodford buys two FTSE 100 giants despite price falls Neil Woodford buys two FTSE 100 giants despite price falls

Star fund manager Neil Woodford has been buying more shares in a brace of FTSE 100 behemoths despite the share prices tumbling.

 Neil Woodford buys two FTSE 100 giants despite price falls

Neil Woodford's third fund has a focus on income

Woodford’s flagship CF Woodford Equity Income fund has returned 29 per cent since launch in June 2014, compared to 18 per cent for the average fund in the IA UK Equity Income sector in the same time period.

Commenting on wider market conditions, the veteran investor remarked, ‘Looking forward, we remain cautious on the outlook for the global economy. We remain sceptical about the notion of imminent ‘reflation’ which has gripped financial markets in recent months and dominated market behaviour.Previously, we have set out why we are not convinced about the impact that President Trump will have on growth, but we are also concerned about the market’s apparent optimism on China.’

Read more: Is UK inflation going to keep rising

‘The Chinese economy is slowing, and this is causing problems for the country’s authorities. Policymakers are doing what they can to maintain annual GDP growth at around the targeted 6.5% level but, in doing so, the economy has become increasingly dependent on debt. This, we have long believed, has created a credit bubble, which policymakers appear keen to keep going, with various forms of debt repackaging programmes being implemented to disguise the extent of non-performing loans and avoid confronting the issue directly. Last year, this kicking of the can down the road provided enough fuel to ignite market optimism on China’s near-term growth prospects but it cannot continue forever. Ultimately, economic fundamentals will have to assert themselves.’

He added, ‘As long-term investors, we remain concerned about the deflationary consequences of that eventuality. Consequently, we remain focused on businesses that are more in control of their own destiny and capable of delivering growth in the challenging economic environment that we continue to foresee.’

The first of the shares of which he has been buying more despite market negativity is clothing retailer Next.

Read more: Top investor buys Next shares despite the shares tumbling

Shares in the high-street company have dropped 44 per cent in a year as initial worries about the EU referendum result’s impact on the UK economy gave way to profit warnings from the company

Woodford has long been a shareholder, and confirmed that he has been buying more.

He said, ‘We have been anticipating a tough trading environment for the company and indeed for all UK retailers, with cost inflation (partly because of sterling’s recent devaluation) and the growing threat from online rivals clearly having an impact. These challenges have been causing more of a problem for Next than we had expected, however, but it is important to remember why we own the shares in the portfolio. It is an extremely well-managed, disciplined company with a well-invested asset base and healthy cash generation. Moreover, it returns the vast majority of its free cash flow to its shareholders. These attractions remain in place despite the recent profit warning. The company will be paying a series of special dividends this year and its shares continue to look attractively valued.’
The second stock in which he has been placing more capital is Pharma giant Astrazeneca. This is already the largest individual investment in the fund.

Shares in the company have been mired in negativity of late. He said, ‘AstraZeneca was the largest detractor from performance. There were no untoward developments at the company itself. However, rival Bristol-Myers Squibb announced that it would not be seeking accelerated approval for an immuno-oncology combination asset as a new therapy for lung cancer. This has led some analysts to become more concerned about AstraZeneca’s Mystic trial, which is investigating the efficacy of a similar asset in the same condition. Whilst this is understandable to an extent, we think the reaction is wrong. Indeed, Bristol-Myers Squibb’s problems in this setting may well turn out to be positive for AstraZeneca. As with any ongoing clinical trial, there is a degree of uncertainty about how the Mystic trial will conclude. Arguably, the market has become overly-infatuated with the importance of Mystic to the AstraZeneca investment case. We believe the company is on the right path for a return to growth regardless of the outcome of Mystic. That said, we remain very confident in the potential that exists within AstraZeneca’s immuno-oncology pipeline, and are optimistic that Mystic will deliver hard evidence of that when it reads out in the middle of this year.’

The Woodford Equity Income fund{in which the author of this article has invested his personal money} has endured a torrid year, materially underperforming relative to its peers.

The fund manager takes the view that the aggressive stock market rally on recent months is a bubble akin to that of the dot.com crash at the start of the millennium.

Woodford’s reputation as an investor of exceptional skill and judgement owes much to his having avoided the hype of both the dot.com crash and the markets before the last financial crisis. In both instances, Woodford’s funds performed poorly until after the bubble burst.

Neil Woodford takes the view that, as with the previous bubble, ‘the fundamentals’ will eventually reassert themselves.

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