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Woodford exits BAE amid pension deficit concerns

Neil Woodford

The Woodford Equity Income fund has sold its position in defence and aerospace company BAE Systems, highlighting concerns about its substantial pension deficit.

It’s not the first time the fund manager has raised concerns about a company’s pension deficit. In June, it raised the same issue about BT when it sold out of the telecoms stock. Like BAE, however, it said the decision to drop that holding was ultimately down to competition for capital.

The BAE announcement comes as the fund reveals performance for July was 6.9 per cent compared to the FTSE All Share’s 4 per cent.

In the fund’s monthly update for July, head of investment communications Mitchell Fraser-Jones says the decision making behind dropping BT and BAE Systems was similar.

“Like BT, it has a substantial pension deficit which is something of a concern in this environment of ultra-low interest rates.

“Nevertheless, its yield remains an attraction but with only modest growth in the dividend expected over the next few years, it is no longer as appealing as other businesses in which we have increasing confidence in a more compellingly attractive total return.”

Fraser-Jones says “all else being equal” investors can expect a return of 6.4 per cent from BAE Systems in coming years, based on a 4.1 per cent yield in its current financial year and dividend growth of 2.3 per cent over the next three years.

However, Fraser-Jones adds: “All else never is equal of course, and we could argue for hours about whether or not that is a realistic growth expectation.

“Our expectation is that BAE Systems may well do slightly better than that in terms of dividend growth going forward but, even so, there are other investment opportunities out there which offer us significantly more attractive prospective returns.”

The fund added to Legal & General, Provident Financial, Babcock, Capita and BCA Marketplace early in the month, taking advantage of distressed share prices “befuddled by Brexit”.

Speaking on the fund’s performance, Fraser-Jones says it delivered more positive returns “assisted by the market’s more rational perspective towards Brexit”.

“The UK market continued its post-referendum recovery in July, having quickly concluded that the UK’s vote to leave the European Union is not as big a deal for the economy or stock market as initially feared,” Fraser-Jones says.

However, he says the market is complacent when it comes to “bigger issues” facing the global economy, such as debt, ageing demographics, deflation and a lack of productivity growth.

For the year to date the fund has returned 2.1 per cent compared to the index’s 8.5 per cent.


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