Neil Woodford talks to David Sandham about what motivated him to launch his new firm, his attitude to AstraZeneca, which is fighting off a bid from Pfizer, the recent fine for Invesco Perpetual and the prospects for markets over the next five years.
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Neil Woodford (NW) interviewed by David Sandham (DS) of Citywire on 2 May 2013:
DS: Neil Woodford is not just one of the best known names in UK fund management he is also one of the most successful. Had you invested £1,000 with him in 1988 and reinvested the income it would be worth £27,000 today. Never afraid to make bold calls, Woodford goes where others fear to tread. He bought tobacco shares when no one would touch them, stayed clear of the dotcom mania during the bubble in 2000 and sold banks well before the 2008 financial crisis tore into the performance of rival equity income funds. But last autumn he shocked the world of investment by resigning from Invesco Perpetual where he’d worked for 25 years and where he was managing around £30 billion. Now aged 54 he's decided to start all over again and this week sees the launch of the firm Woodford Investment Management, providing a potent challenge both for his former employer and his traditional rivals.
DS to NW: You’re 54 years old, you clearly don’t need to work and yet here you are, setting up a new asset management business with ambitious plans. What drives Neil Woodford?
NW: I think I have a lot of energy and enthusiasm for the profession that I’m in; I think I have a lot to offer. An opportunity has come along to build a fund management business with a clean sheet of paper, fit for the 21st Century without any legacy infrastructure, without any legacy infrastructure costs. So, we can build it in a way that creates, if you like, the right environment for fund managers to work in, for the right environment for other key people to work in, I think we’re going to keep the business low cost. So, all of those things I think are a unique function of the ability to start again and build from the ground.
DS: The main new fund is an equity income fund; it will be in the IMA equity income sector, is that right?
NW: Yes it is.
DS: Will you commit to keeping it in that sector? The reason I ask is because one of your previous funds recently dropped out into the all companies sector so, will you keep the income mandates?
NW: That is the ambition. We’re launching in income fund, the ambition is to retain that fund in the income sector. We think we’ll be able to deliver a 4 per cent yield to start with, prospective yield and that is the ambition, but of course, I’ve said this all through my career running incoming funds. That my focus is on total return and as I have done in the past, and I think, it’s been the case, more recently, perhaps not in the immediate past, but certainly before the financial crisis, there are occasions and there will be in the future, I’m sure, there were occasions when the best dividend yields available in the market may well be available in shares that I fundamentally don’t believe in. So, one should never allow…
DS: Paying out high dividends and the company doesn’t look too healthy?
NW: Yes, that may not be sustainable, I mean the banks were paying high yields apparently, high yields before the financial crisis, but of course…
DS: You sold Lloyds of course, well before the financial crisis.
NW: Well I was out of the bank sector. So, delivering a market competitive yield at that time was quite tricky because the biggest yielders in the market were the banks and, of course, they were about to all cut their dividends or pass their dividends.
DS: Now how tricky will be delivering a 4 per cent yield today? Now, if you look at Glaxo, that’s traditionally one of your big holdings, that’s yielding about 4.7 per cent, no problem. If you look at AstraZeneca because of the Pfizer bid, that’s driven the price up and the yield down to about 3.45 per cent. So, a little bit expensive to buy, AstraZeneca, at the moment?
NW: No, not at all, immediate yield is not a guide, necessarily, to value so, when we’ve thought about how to structure the fund and certainly, I’ve been running funds for my previous employer, I continue to run income funds for St James’ Place. So, when you look at those funds and think about the portfolio shape at the moment, I think it is possible to deliver a 4 per cent yield and to deliver dividend growth, going forward, but as I say, you must never allow an income target to dictate what you own. If the fundamentals don’t support the stock in the portfolio, then it shouldn’t be there, regardless of what its dividend policy is or what its distribution level is. So, at the moment, we think that the fund can sustain a position in the income sector that the 4 per cent yield that can grow from that level is achievable without doing anything that I wouldn’t be happy to do, but of course, there’s no guarantee here and in time, we may well have a repeat of the sort of situation that we had before, as I described, where it isn’t appropriate to buy high yield stocks because I don’t believe in the fundamentals and in that instance, it may well be appropriate for the fund to come out of that sector, but the ambition is to keep it there.
DS: What do you think of the Pfizer bid for AstraZeneca? Have you met, Ian Read, the chairman?
NW: I spoke to Ian Read yesterday. I’ve spoken to Pascal Soriot a couple of times.
DS: That’s the chief executive of AstraZeneca?
NW: Chief executive of AstraZeneca yes so, I am busy with this sort of thing at the moment, but I am doing some fund management at the same time and I am up to speed with what’s going on.
DS: Well, the latest bid is for £50 per share, but only a third of that is in cash, is that enough?
NW: Correct. Look, I’m not going to talk about what may or may not be enough. What I will say is that, I have built a very substantial position in AstraZeneca, I was, until recently the biggest shareholder in AstraZeneca. I still, in a St James’ Place fund retain very big positions, it is the biggest holding I’ve had, not just in terms of recent history, but in my entire career as a fund manager. So, it’s a very big commitment, and I committed that sort of capital to that stock because I believed in its future. I do still believe in its future. I believe in the value of its pipeline. It is an infinitely better managed business now than it was. It, I believe, has a very, very profitable and valuable future as an independent entity.
DS: Now fund size, you mentioned St James’ Place, they’ve already committed £3.56 billion to you and I’m sure that you’ll get a lot more soon. Will the funds become too big, this was a worry that investors had previously, that the funds get very, very, very big, I think you were managing just about £30 billion at Invesco Perpetual?
NW: A bit more than that.
DS: A bit more than that and doesn’t it become unwieldy, you have to have too much in mega-caps and that can dampen the degree of your outperformance can’t it?
NW: Well, this has been a question that I’ve been asked on so many occasions. I think it first came up when, I think, the high income fund went through £500 million, which was way back when, in the 1990s. The fact is that history shows and the industry, I believe, shows that fund managers with the right skill set can deliver great performance with large pools of assets.
DS: Invesco Perpetual were fined by the FSA recently for £18.6 million. Now, when did you first realise that something was wrong?
NW: As far as the FSA is concerned, the company that previously employed me has been fined for failure to disclose and some compliance and administrative failings. I am now part of Woodford Investment Management; I’m looking forward, not back. I don’t really want to talk about something that belongs in the past, that belongs to a company that I used to be a part of, but I am no longer am part of, I’m moving forward with a new business and very excited about the future of that business.
DS: Do you think the fine was fair?
NW: I think I’ve said all I want to say about that.
DS: Okay. I have some questions from our readers and one is from Jim Aitkenhead, he’s an adviser at Martin Bound Financial Services in Leicestershire and he says, he’s recommended the Invesco Perpetual high income fund for more than 20 years and that you’ve made more money for him than any other manger. However, since you left Invesco Perpetual, he’s reviewing that fund, but he says he’s now looking at the Vanguard FTSE UK Equity Income fund which is, as you know, a passive tracker on a TER of 0.25 per cent. So, he’s looking at that, he has been with you, all his career, what do you say to Jim?
NW: Well, I would say to Jim that trackers passive strategies definitely have a role in the markets and arguably, certainly in the last five years, when we’ve had a policy backdrop which has been deliberately designed to lift all asset prices, maybe tracker strategies have been, arguably, very successful at that Because all asset prices were rising, stock correlations became very high, maybe that’s a great environment for tracker funds, but I would…
DS: That tracker’s actually outperformed your Invesco fund since its launch in 2009.
NW: Well I don’t know the precise performance figures, but the fact is that the last five years has seen, as I said, an extraordinary period in history with respect to monetary policy and the amount of stimulus available. Interest rates have been on the floor, gigantic amounts of money have been printed by central banks with the specific objective of inflating asset prices. They’ve been very successful at achieving that, we’ve had a 5 year bull market. The tide has lifted all ships, I think the next 5 years are going to be much more difficult, valuations have moved well beyond what is, in general terms, may well be what’s supported by economic fundamentals and corporate fundamentals, and valuations have risen significantly. I think the challenge, going forward, will be one that will be characterised by less bullish markets I believe, and less correlation, a sort of more normal economic environment, where fundamentals do matter, economic performance matters. Cash flow, dividend and revenue growth, all of these things reassert themselves. So, I think it’s an environment where fund management skill comes to bear more prominently than it has, arguably in the last five years.
DS: Neil Woodford, thank you very much.
NW: Thank you.