Investment Greats: Neil Woodford

Published in Investing Strategy on 27 July 2009

He may be the youngest of our Investment Greats so far, but Neil Woodford has a habit of being right on the major trends.

Neil Woodford's contrarian and dividend-focused approach has always been popular in Foolish circles.

Background and early career

Born in 1960, Neil Woodford is the youngest of the Investment Greats we have looked at so far in this series. Having graduated with a bachelor's degree in economics and agricultural economics from the University of Exeter in 1981, his career took him through Dominion Insurance, TSB and Eagle Star, before joining Perpetual in 1988.

In 2000, when Perpetual was bought out by Amvescap (now Invesco), Woodford reportedly made £50m on the deal, in addition to retention bonuses.

Invesco Perpetual

Woodford's main concerns at Invesco Perpetual are the management of its two big equity income funds: Invesco Perpetual High Income, which manages assets of £7.9bn, and Invesco Perpetual Income, managing £5.8bn.

While these funds been hurt along with just about everything else on the stock market, they have both outperformed the UK Equity Income and Growth benchmark in each of the last five years, and outperformed the FTSE All-Share Index in four of those five years.

In addition to these unit trusts, Woodford took over the management of the famous Edinburgh Investment Trust (LSE: EDIN), which has a market capitalisation of about £644m, in September 2008. Performance at the trust is still lagging, probably due in part to the fact that it uses leverage, which will have amplified the normal stock market grief. And this borrowing has to be paid for, at an average rate of 9.6%, so that presents a further hurdle to performance when the market is weak.

Investment style

Woodford is not afraid to swim against the current, and he doesn't flinch in the face of criticism. Avoiding the frothy technology sector during the bubble in the late 1990s caused him to under-perform the market, but he stuck to his position and was ultimately shown to have been correct.

And while his targets are 'value' companies paying chunky dividends, he wisely shunned the banking and property sectors long before the current issues came to light. Although he could see problems coming, he is required to invest in equities rather than cash, so weighted the portfolios heavily towards defensive sectors such as pharmaceuticals, utilities, and tobacco.

His advice in May 2008 that "this is certainly not a time to be deserting equity", does look a little unfortunate given the turmoil of the past year, but it should also be borne in mind that he is looking at typical holding periods in excess of five years, and over that timeframe he may yet be right.

Due to the size of the funds he manages, there is an inevitable bias towards large companies, but where he can he also takes positions in smaller operations: "The reality is that I have quite a long tail of small-cap stocks in the portfolios. I build positions over time, sometimes over several years, and if I pick the right company, it will grow into a bigger one."

As far back as 2004, he was bearish on house prices, expecting a "healthy correction" of 30-40% from the prices at that time, so with hindsight he seems to have underestimated people's willingness to overpay.

Current positions

Woodford is decidedly gloomy regarding the prospects of recovery in the UK economy. He regards the recent strength in banking and cyclical stocks as unfounded, and believes we are fooling ourselves in thinking that the economy is on the mend.

Rising unemployment will choke off consumer spending, while the massive personal and corporate leverage that fueled the boom will take years, rather than months, to unwind.

Those defensive sectors of pharmaceuticals, utilities, telecoms and tobacco are still his main priorities. His biggest holdings at present are AstraZeneca (LSE: AZN), GlaxoSmithKline (LSE: GSK), BG Group (LSE: BG), Vodafone (LSE: VOD) and British American Tobacco (LSE: BATS).

I'm sure many in the Motley Fool community will be tracking his performance over the coming years.

More investing greats:

John Bogle | George Soros | Ben Graham | Jim Rogers | Warren Buffett | Anthony Bolton | Jesse Livermore | Jim Slater | Charlie Munger | Peter Lynch | Carl Icahn | Philip Fisher | Ken Fisher | John Neff | John Templeton | Mark Mobius

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