Over the weekend, I was reading the latest investment commentary from Woodford Investment Management. The team advised that while the year ahead does pose macroeconomic challenges, it is confident that its strategy is appropriate for the current economic conditions and is capable of delivering attractive returns for investors.
However, there was one thing that surprised me within the update and which has gone under the radar. Neil Woodford has been selling down his stake in pharmaceutical giant AstraZeneca (LSE: AZN). At the end of December, AZN had a 6.8% weighting in Woodford’s Equity Income fund. By 28 February, the holding was just 1% of the portfolio. So, why has Woodford sold AstraZeneca and should investors follow his move?
Sizeable outflows
It’s no secret that, after a couple of years of poor performance, Woodford’s funds have experienced sizeable outflows in recent months. Investors have lost patience. When this happens to a fund, the portfolio manager has the challenge of raising capital to meet the redemptions. Sometimes, a portfolio manager will choose to slice a few percent off every holding in the portfolio. At other times, the manager will take a more active approach and sell specific holdings. This is what Woodford has done. In order to meet redemptions and rebalance the portfolios, he has been reducing his exposure to AstraZeneca across all mandates.
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Investment case
The interesting thing is, he still believes the long-term investment case for AZN is “appealing.” The team believes the pharma giant has been successfully transformed under the leadership of CEO Pascal Soriot and that the group’s prospects are not fully reflected in the share price. It advised that “not a great deal” has changed as far as the investment case for goes and that it is still attracted to the pipeline story. Furthermore, Woodford is still bullish on healthcare as a theme.
At the same time, he believes many other stocks have become increasingly attractive from a valuation perspective recently. He has been keen to rebalance his portfolios and position them where the gap between current share price and the ‘long-term fundamental valuation opportunity’ is widest. In particular, he sees valuation opportunities in domestically-exposed stocks such as Lloyds Banking Group, Barratt Developments and Crest Nicholson at present. He has been adding to his positions here, as well as to other stocks such as Provident Financial and Babcock International.
Should you follow Woodford?
I can understand the reasoning behind selling, to a degree. The portfolio manager has had to raise a lot of capital to meet redemptions and with AstraZeneca trading on a forward-looking P/E ratio of 20.7, it’s one of the more expensive stocks in his portfolios. In contrast, Lloyds trades on a forward P/E of just 8.6. Trading out of AZN and topping up cheaper stocks makes sense.
Having said that, I don’t think investors should necessarily do the same and bail out. While the stock may not be a bargain buy at its current valuation, the long-term story does look attractive. The world’s ageing population is likely to result in robust demand for pharmaceutical products in coming decades, and with a healthy pipeline of drugs in development, the £63bn market cap company looks well placed to capitalise. With a dividend yield of 4% on offer, I rate the stock as a ‘hold.’
