He noted that equity markets were generally in negative territory in June, and ascribed this to market nerves about further interest rate rises in the US, and possibly the UK.
Having enjoyed a strong run in the first five months of 2017, equity markets came under pressure in June. This was partly the result of conflicting messages emanating from the major central banks.
Woodford has long taken the view that the current elevated level of inflation in the UK will prove temporary, and that the outlook for the UK economy is better than is currently forecast by the market.
The FTSE 100 stock in which he has sold all of his share of late is British American Tobacco.
Tobacco is a sector on which Woodford has long been keen, as he felt that the market was far too negative on the outlook for the sector as it expands into emerging markets.
He commented, ‘we completely sold the fund’s position in British American Tobacco which has been present in the portfolio since its inception and has been a part of Neil’s mandates practically throughout his career. Neil owned stakes in tobacco companies before the dot.com bubble of the late nineties, but it was that episode of market history that marked a significant increase in tobacco exposure which has prevailed until recently. During the bubble, old economy stocks like British American Tobacco became completely unloved by the market – at the peak of the dot.com bubble in March 2000, you could have bought shares in British American Tobacco for just £2.25 per share. We have recently disposed of the holding at over £50 per share.
Over the last twenty years, tobacco has been the best performing sector in the UK stock market as a combination of dividend income, dividend growth and, over time, a re-rating to more appropriate valuation territory, resulted in material capital appreciation for investors and an even more substantial total return. We still retain some exposure to tobacco through Imperial Brands, which remains undervalued in our view, but the valuation opportunity elsewhere in the sector has largely played out. We have evolved the portfolio towards other areas of the stockmarket which we believe can deliver more attractive long-term returns to shareholders.’
The veteran investor then turned his thoughts to how he has invested the cash raised from the sale of his British American Tobacco shares.
He disclosed, ‘we increased the positions in a number of other domestically-focused stocks including Barratt Developments, British Land, Taylor Wimpey and Lloyds – again reflecting our more positive view of the UK economy. We also took advantage of share price weakness to add to the fund’s position in Provident Financial.
Furthermore, we introduced two new, albeit small holdings. One of them is Morses Club – a very cash generative business that provides unsecured, short-term loans to its customers. Also, we participated in a funding round for unquoted technology company, Drayson Technologies which is an innovative early-stage company with a range of technologies focused on the ‘internet of things’ and digital health.’
The CF Woodford UK Equity Income fund has returned 37 per cent over the past three years, compared with 26 per cent for the average fund in the IA UKEquity Income sector in the same time period.