The latest fund updates from ace investor Neil Woodford reveal that May was a busy month for trading. This reflects something of a repositioning of his flagship Equity Income fund, as he becomes increasingly bullish on the UK economy, and also further buying for his new Income Focus fund.
Woodford and his team said: "We remain cautious on the outlook for the global economy despite the market's lingering optimism on growth. Meanwhile, we continue to warm to the prospects for the domestic economy."
They added: "The UK election result doesn't change the fundamentally positive backdrop for the UK economy, in our view. Indeed, with its implications for looser fiscal policy and a softer Brexit, the UK economic outlook appears to have improved still further."
UK cyclical buys
Woodford bought shares in a number of companies with a domestic focus, including Lloyds, British Land, Barratt Developments,Taylor Wimpey, Countryside Properties and Topps Tiles.
It's worth noting that he's not blanket-buying UK cyclicals but is being very selective. So, if you're looking for exposure to the domestic economy for your own portfolio, Woodford's stock picks could be a good place to start.
A fully-valued stock
His buying of UK cyclicals was substantial enough that he had to make sales elsewhere to fund the purchases. In particular, he significantly reduced the holding of British American Tobacco(LSE: BATS) in his Equity Income fund.
Shares of the global tobacco giant reached an all-time high during the month. Woodford and his team say they were "reluctant to reduce our exposure to such a high quality, dependable growth business" but that the stock "now looks as fully-valued as it has ever done in modern market history".
They contrast BAT with its FTSE 100 tobacco peer Imperial Brands, which they say "now looks by far the more appealingly valued of the two." I'm inclined to agree. Imperial Brands' current-year forecast P/E of 13 is markedly lower than BAT's 19, while it also offers a higher yield of 4.8%, compared with BAT's 3.3%.
Outside of the buying of UK cyclicals, the purchase that caught my eye was the initiation of a new position in Vodafone(LSE: VOD) for the Income Focus fund.
Woodford and his team said: "Over the last few years, we have had concerns about Vodafone's strategic focus, the scale of its capex commitment, operational execution and, above all, the sustainability of its dividend." However, they told us their concerns have now diminished. They said: "We had a very encouraging meeting recently with Vodafone's finance director which outlined a much clearer strategy for the business and we are becoming more confident in its ability to deliver against that strategy."
I can see why Woodford's warmed to Vodafone for his Income Focus fund. Although it's on a high P/E of 30 and its dividend isn't covered by accounting earnings, prodigious free cash flow supports the running dividend yield of 5.8%.
G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Imperial Brands and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.