View the article online at http://citywire.co.uk/money/article/a891287
Woodford: Lloyds improved but I'm still not buying
Star fund manager concedes Lloyds is more investable than ever but longstanding bank bear still fears vulnerability to housing market.
In a live question and answer session with investors, Citywire AAA-rated Woodford said Lloyds was 'much improved and arguably more investable than at any stage since the financial crisis'.
But the Woodford Equity Income manager, who has long shunned the banking sector, said Lloyds' progress was not enough to convince him to break his habit.
'It is still not sufficiently attractive to warrant a place in the funds,' he said. 'One thing that continues to concern me is the exposure to the UK housing market. Any correction here would shatter the consensual view that its balance sheet is rock solid.'
Woodford's avoidance of the banking sector as the financial crisis hit is one of the key contributors to his standing as among the UK's most successful fund manager. Since the crisis, his only foray into the sector has been to buy shares in HSBC (HSBA) in 2013, selling them two years later on fears over spiralling compensation costs.
Last month, he warned the sector was likely to disappoint investors with poorer-than-expected dividends, a prediction that has largely proved true, with Barclays (BARC) more than halving payouts for the next two years and Royal Bank of Scotland (RBS) signalling dividends would only resume in 2017 at the earliest.
The one exception was Lloyds, which surprised investors with a 2.75p payout, including a 0.5p special dividend in 2015, a huge increase on the 0.75p it paid in 2014 as it returned to the dividend register.
Nor has Woodford seen anything to convince him to bring oil majors into the portfolio. Woodford dumped BP (BP) and Shell (RDSb) from his former Invesco Perpetual Income and High Income funds in 2009, and said he remained 'cautious about the investment attractions of this sector'.
'Whilst oil prices remain below $60-70 per barrel, the global integrated majors fail to generate sufficient cash flow to fund growth in the business and dividends,' he said.
'Currently dividends are being paid from asset disposals or by increasing borrowings. In other words, they are unsustainable unless oil prices rise significantly. In my view, oil market fundamentals do not support his sort of rally in the price of oil.'
Woodford was meanwhile unruffled at the prospect of Donald Trump ascending to the US presidency, arguing the firebrand property mogul was likely to moderate some of his more extreme views if elected.
'In addition, the checks and balances in the US political system would clearly make some of his more extreme policy choices unlikely to prevail,' he said. 'My conclusion is, if he were elected, it would have a very limited impact on the US economy.'
Plea for patience
The manager urged investors to judge him over a longer time scale, and said he was pleased with the progress being made by the early stage businesses in which he had invested.
'The weakness of the share price and net asset value since the start of 2016 has been the product of the pretty severe sell-off in shares across healthcare, biotech and early-stage quoted stocks, both here in the UK and in the US,' he said.
'Much of this, we believe to be driven by short-term positioning and rotational activity amongst the fund management community. We don't believe that it is driven by a correction of over-valuation, nor by a deterioration in fundamentals.'
'As with all our investment decisions, the sale of Rolls-Royce was the product of a three to five-year investment view,' he said.
'What has happened since we sold neither validates nor invalidates the decision. We will have to wait and see whether our analysis and judgment proves accurate.'
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- Lloyds Banking Group PLC (LLOY.L)
- HSBC Holdings PLC (HSBA.L)
- Barclays PLC (BARC.L)
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- Rolls-Royce Holdings PLC (RR.L)
- Royal Bank of Scotland Group PLC (RBS.L)
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