Woodford buys into Royal Mail and Oakley Capital

Neil Woodford’s CF Woodford Equity Income fund took a 1.5 per cent position in Royal Mail last month as valuations fell back to more attractive levels.

Meanwhile, the £2.37bn start-up fund founded by former Invesco Perpetual equity income head Woodford has dropped its holdings in Novartis, Altria and Serco. Healthcare firm Novartis was the largest of the positions cut, at 2 per cent.

An update on the Woodford Investment Management website says Royal Mail was the largest new name added to the portfolio during July.

Royal Mail posted the largest one-day rise of a UK privatised company on its October debut and peaked at 618p a month later. It trades today at 418p.

“This is fundamentally a very attractive, cash generative business,” Woodford IM says.

“It has its challenges, not least the competitive threat in profitable, densely populated areas. But it has its opportunities too, such as slowly working to bring its cost base into line with its competitors.”

With an operating margin of 4.6 per cent – its peers run between 8 and 10 per cent, according to Bloomberg – but Woodford and his team are impressed  with management and expect improvement.

Woodford has also taken a 1 per cent position in Oakley Capital, the private equity house that initially helped Woodford get his new asset management firm off the ground.

Oakley was replaced as fund administrator by Capita Financial Managers soon after the official launch of Woodford Investment Management.

The fund has also bought into several other smaller companies.

It has bought into Raven Russia, an investment company focusing on Russian commercial property, as well as British private hospital network Spire Healthcare and Abzena, a spin-off from Imperial Innovations, an intellectual property monetiser that Woodford has owned in his top 10 since launch.

Abzena listed on Aim last month – the fourth Imperial Innovations company to do so in the past month – and Woodford took a 0.35 per cent position.

Woodford’s team has been surprised by markets’ lack of concern for macroeconomic ructions.

“The unrest in Ukraine-Russia and Israel-Gaza, for example, initially shrugged off by the market, but in recent days the market seems to have become, quite rightly, a bit more concerned,” the team says.

“These issues are not positive for an already troubled global economic outlook and do not look easy to resolve.”

The market’s poor estimation of the announcement that Reynolds American will buy Lorillard was in contrast of the Woodford team’s view of the deal.

“This is probably a case of it being better to travel than to arrive, however: The sector had a very strong run of performance in anticipation of the deal,” the team says.

It should allow both parties to scale up, become more efficient and boost their brands, they add.

“This is a sector that has created considerable shareholder value through M&A in the past. Tobacco companies have done this by doing the right deals, at the right price, at the right time. We remain positive on the sector and bought more shares in each of the companies involved, focusing particularly on the opportunity to add to Imperial Tobacco and Reynolds American at the lower prices that prevailed after the deal had been announced.”

The Woodford fund was £2.37bn at 1 August, according to FE Analytics, up from £1.6bn at launch.