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What is the ‘incredible’ investment opportunity Neil Woodford has spotted?

Neil Woodford has highlighted the “incredible opportunities” he is seeing in early stage unquoted science start-up companies.

In an interview with Money Marketing, the fund manager, who has left Invesco Perpetual after more than 26 years to become head of investments at Woodford Investment Management, says such investments will be reflected in his income portfolio and may lead to the launch of a specialist vehicle.

He says: “My interest in smaller companies is largely driven by what I think are the incredible opportunities in early stage science. These are start-up businesses, whether quoted or unquoted, which are based on the scientific discovery, innovation that is coming out of British universities and research houses as well as internationally.

“This is great science which has an acute need for capital, but the problem is capital provision, there are very few investors who have the means or desire to invest in them. So I think this creates a fantastic opportunity.”

Woodford’s first priority, since joining the firm last week, is the soon to be launched CF Woodford Equity Income fund and the income mandates he is running for St James’s Place.

There won’t be any surprises in his investment strategy for the fund which will be very similar to his previous Invesco Perpetual income funds.

“It would not be possible to completely clone the precise nature of my previous fund but the strategy will be the same with the same sector biases, the same prominent positions,” he says.

Perhaps the most relevant of Woodford’s major positions right now is AstraZeneca – currently the top holding in his SJP funds – following the recent recent takeover bids for the UK-based company by US pharmaceutical giant Pfizer.

Woodford believes AstraZeneca has an “attractive independent future” and argues that any disruption from a possible acquisition to Astra’s “rapidly maturing” drugs pipeline could prove “incredibly value destructive”.

Another of Woodford’s well-known sector calls that he has no intention of reconsidering any time soon is his avoidance of banks, describing the expectation that domestic UK names will be able to pay hefty dividends again as a “myth”.

“These banks don’t have enough capital and too much leverage so the regulator will continue to grind away and they will either have to shrink their balance sheets or grow more capital,” he adds.

“By implication what this means is that the notion that these companies will be giving out gigantic dividends is a myth.”

HSBC proves the exception to this rule as the only bank holding currently in Woodford’s portfolios thanks to its “better capitalised and profitable business” and more attractive level of dividend.

Woodford is more optimistic on the outlook for another area of the financial services sector following the scrapping of annuities as part of the 2014 budget. L&G is currently a sizeable position in Woodford’s SJP funds and he is comfortable the changes to annuities can bring benefits.

He says: “L&G will look less like a traditional life insurance company and more like a fund management business going forward. It might mean lower margins but what that might also mean is less capital intensity as well.”

These changes should also see equities feature more prominently in the retirement market, Woodford argues. He adds: “The fact is most people retiring today have an average life expectancy of 20-25 years so why is it not appropriate to have an equity in their investment strategy with this horizon?”

For the full interview with Neil Woodford see this week’s copy of Money Marketing magazine 


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