Ace fund manager Neil Woodford has hammered the market over a quarter of a century. Much of his success has come from seeing the big picture and pumping money into sectors that have delivered juicy returns, while avoiding those that have underperformed.
Stephen Lamacraft, a member of Woodfords team, has recently penned an article that reveals one big-picture driver for the current positioning of the CF Woodford Equity Income fund.
Three companies the fund has backed to benefit from this driver are AstraZeneca (LSE: AZN) (NYSE: AZN.US), Smith & Nephew (LSE: SN) (NYSE: SNN.US) and Capita (LSE: CPI).
The silver age
Lamacraft writes that with its population ageing rapidly, the world is entering a silver age. He notes that this trend presents long-term challenges for policy-makers, but also opportunities for investors, with older people spending considerably more money on healthcare.
AstraZeneca
A whopping 30% of the CF Woodford Equity Income fund is invested in the healthcare sector. Woodfords biggest single holding in the sector in fact, the funds number one holding outright is pharmaceuticals firm AstraZeneca, with a hefty weighting of 8%.
AstraZenecas shares are currently trading at around 44, putting the company on what looks, on the face of it, a pricey forward P/E of 17.5. However, Woodford puts a much higher valuation on the company. He was happy to see AstraZeneca reject a 55-a-share takeover bid from US giant Pfizer in May, arguing the bid undervalued the strength of Footsie firms drugs pipeline.
Smith & Nephew
Outside of drugs companies, Woodfords biggest healthcare bet is Smith & Nephew, a medical devices firm, best known for hip-replacement products. Clearly, the market for the treatment of hip arthritis and hip injury as well as the companys other areas, which include knee and shoulder treatments is going to grow with ageing populations.
Smith & Nephews shares have been trading at over 10 in recent months, and as high as 11. Again, this companys shares look pricey on a P/E valuation: about 18. Nevertheless, Woodford has been happy to invest on this kind of rating.
Capita
Lamacraft also highlights in his article more oblique opportunities that flow from an ageing population, noting that this demographic trend will increase the already considerable strain on government budgets. He sees this as a growth driver for private-sector outsourced solutions: This is positive for companies such as Capita which offer solutions which can deliver a better service at a much lower cost than the civil service has been able to.
Capita is the sixth-largest holding of the CF Woodford Equity Income fund. Once again, this company looks on the pricey side on a conventional P/E of 17 at a recent share price of around 11.50. But, once again, Woodford has been happy to buy.
The P/E isn’t everything for Woodford, and one thing he really prizes is a company’s potential to deliver strong and sustainable dividend growth. It’s a philosophy we very much agree with here at the Motley Fool.
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G A Chester has no position in any shares mentioned. The Motley Fool owns shares in Smith & Nephew.
