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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.

 
Woodford: Lloyds improved but I'm still not buying

Star fund manager Neil Woodford believes Lloyds (LLOY) is on its surest footing since the financial crisis, but still fears the bank's vulnerability to a housing market correction.

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

Woodford also faced a number of questions over the performance of his Woodford Patient Capital (WPCT ) investment trust, whose shares have slumped around 14% since launch last April.

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.'

He gave a similar answer to a question over the sale of his stake in Rolls-Royce (RR) in the income fund, with the shares having rallied by around 18% since he announced he had dumped the stock.

'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.' 

6 comments so far. Why not have your say?

Anonymous 1 needed this 'off the record'

Mar 14, 2016 at 17:17

Every time I have stated the same thing on Lloyds I get beaten down on it, every bank has its ace up its sleeve and Lloyds is precariously playing well on the UK housing game... Been keen on the mining stocks, precious metals though but have avoided a lot of them.

Wish I had large amounts of money to make these calls!

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helmet

Mar 16, 2016 at 09:56

Does anyone else have the feeling Neil Woodford is a little like the "Emperors New Clothes" he's always in the media these days, quite a lot of media marketing does he have the performance to back it all up especially in this difficult environment.

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Anonymous 1 needed this 'off the record'

Mar 16, 2016 at 10:01

I agree with that point, frankly it takes decades to match the likes of Warren but yet he is compared to and idolised as such a figure in the media.

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Gristybeasty

Mar 18, 2016 at 13:24

Frankly, I consider Woodford has been 'lucky' with his investment choices and recommendations. He is a no wonder genius and i certainly disagree with his view over Lloyd's and as for, RR not clever.

I personally would not follow his investment advice!

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S_M

Mar 20, 2016 at 09:38

Gristy you can be lucky with investments over 1 year. Woodford has been consistent in outperformance over a number of years. Hardly luck.

He is spot on with Lloyds a company that makes its profits from retail banking. Wait until UK property prices collapse(and they will), then once again he will look a genius when all he is saying is common sense.

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Anonymous 1 needed this 'off the record'

Mar 20, 2016 at 11:09

I find that people have more of an emotional connection with Lloyds than a sense of reality, for the love of me I do not know why so.

Though long shunning banks shows he has no apetite for much risk and it hasn't been exactly hard to make a profit for the last near decade what with the near 0% inteterest rates on the market.

He is no genious, just knows not to throw the tea out the window when it is hot.

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