Woodford buys Lloyds and sells GSK

Marina Gerner
15 May 2017

Neil Woodford has made portfolio changes to his Woodford Equity Income fund - which is a Moneywise First 50 Fund - dropping GlaxoSmithKline (GSK) and adding Lloyds to the portfolio, as well as stocks including housebuilders and property.

"As a result of our growing confidence in the long-term outlook for the UK economy, we have been selectively building a greater exposure to domestic cyclical businesses," reads the company’s statement on the portfolio changes.


Woodford is quoted as saying that "banks should be viewed as warrants on economic growth". Further, the statement argues that banks play a pivotal role in the economy through the creation of credit.

"When a banking system is functioning normally, credit creation fuels economic growth and the central bank monitors and influences the quantity of credit being created by adjusting base interest rates, as a tool for managing the economic cycle. In a benign economic environment, banks therefore offer leveraged exposure to economic growth.

"For much of the post-financial crisis period, the UK banking system hasn’t been functioning normally because it has been in a prolonged process of rehabilitation – rebuilding capital and slowly recognising losses that were incurred during the crisis."

But more recently, it argues, the process now appears to be largely complete in the UK, as evidenced by the recent pick-up in bank lending activity.


"Specifically, we view Lloyds as a well-managed bank with a conservative approach to its balance sheet. Its valuation looks very attractive in our view, and it has the ability to pay a very healthy and growing level of dividend."

The team funded the new addition of Lloyds as well as other additions to the portfolio through "a combination of inflows, a slight reduction in the holding in British American Tobacco and the complete disposal of the fund’s position in GlaxoSmithKline, where this evolution of strategy has catalysed a change of investment view."

Peter Brunt, senior manager research analyst at Morningstar, argues that Woodford’s move into Lloyds marks a clear sea-change with regards to UK domestic banks.


"He briefly held a position in the global bank HSBC in 2013/2014 at the end of his time at Invesco Perpetual and at the launch of the CF Woodford UK Equity Income fund, but has avoided domestically focused banks for well over a decade.

"Previously, he has cited concerns over the quality of loan books, capital adequacy, leverage ratios and the threat of regulatory intervention, but clearly he feels that the necessary repairs have been made, at least in the case of Lloyds.

This article was written for our sister magazine, Money Observer.

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