Ace fund manager Neil Woodford built his reputation over a quarter of a century by investing largely in humdrum blue-chip stocks that trounced the performance of the wider FTSE 100 index.
When he went it alone and launched his CF Woodford Equity Income Fund in June 2014, the portfolio had a familiar feel. It was dominated by 17 familiar FTSE stocks, which accounted for almost 60% of the fund's weighting.
However, the number of blue-chip holdings has dwindled ever since. Last week's news that troubled outsourcer Capita is to be demoted to the second-tier FTSE 250 leaves Woodford with just eight FTSE 100 stocks, with an aggregate weighting of 43%, based on his last published portfolio at 31 January. Put another way, he currently sees no merit in being invested in any of the 92 other stocks in the UK's top index.
The elite eight
The table below shows the eight FTSE 100 holdings currently in Woodford's equity income fund.
|Company||Sector||Rank in fund||Weighting|
|AstraZeneca (LSE: AZN)||Pharmaceuticals||1||7.99|
|Imperial Brands (LSE: IMB)||Tobacco||2||7.72|
|British American Tobacco||Tobacco||4||6.72|
|Legal & General (LSE: LGEN)||Life insurance||5||5.29|
|Provident Financial||Financial services||6||4.89|
|Babcock International||Support services||13||1.88|
Woodford's FTSE holdings are not just few in number, but also highly concentrated by sector -- limited to just six of the 41 sectors in the FTSE classification. I'd suggest that this master investor's high-conviction FTSE bets are worth more than a passing glance by private investors looking to buy blue chips for their portfolios.
AstraZeneca, Woodford's top pharma bet and biggest overall holding, currently has a lot to offer investors. The company is coming to the end of a tough period in which expiring patents have taken a heavy toll.
It's not quite out of the woods yet, with management expecting a low-to-mid single-digit percentage decline in revenue and a low-to-mid-teens percentage decline in earnings for 2017. However, top-line and bottom-line growth are forecast for next year as the company's reinvigorated pipeline of new drugs starts to kick in.
At a current share price of 4,770p, Astra trades on 14.8 times forecast 2018 earnings, with a prospective 4.7% dividend yield. I believe this is an attractive proposition for a company heading into a new phase of growth in the coming years.
Tobacco is one of the most reliable industries around and Imperial Brands is Woodford's biggest holding in this sector. The company delivered 12% earnings growth last year, and increased its dividend by 10% for an eighth consecutive year. Furthermore, management remains committed to this level of increase "over the medium term".
At a current share price of 3,805p, Imperial trades on 14.1 times current-year forecast earnings, with a prospective 4.6% dividend yield. Again, this is a stock that looks very buyable to me at its present valuation.
Leading life insurer
Outside of pharma and tobacco, Woodford's largest holding is insurer and asset manager Legal & General. As this business is more closely linked to the performance of the wider economy and as there's current uncertainty about the economic impact of Brexit, the stock is at a cheaper valuation than Astra and Imperial.
At a current share price of 255p, L&G trades on 11.8 times current-year forecast earnings, with a prospective 6% dividend yield. To my eye, this is an attractive rating as a trade-off for the higher volatility of a cyclical business.
G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and Imperial Brands. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.