Thursday, March 12, 2015

Cloning Woodford

Cloning is a great American tradition. Specifically, there's a long history of Americans successfully cloning British ideas, think about "The Office." Who was better David Brent or Michael Scott? Who cares, they were both great. In that spirit let's take it to stocks, and cloning ideas from great investors, done right, is a solid strategy.

Neil Woodford manages stock market thumping Equity Income funds for several decades. Todd Wenning points out that Woodford's distinctive style and excellent results can be traced back to a focus on dividend growth.

Its interesting to follow Woodford's portfolio for both individual selections and for what areas he avoids. For a fund that dwells in the Equity Income segment, he has long eschewed some traditional dividend paying sectors like energy and banks.

Woodford's main stock picks naturally are heavily slanted to the UK, but I wondered if he worked in the US, what stocks would he buy?

So I put together a list of Woodford's top ten holdings and then looked for a rough US equivalent.

One note is that the current S&P 500 yield is 1.9% whereas the FTSE 100 yields 3.2% Woodford's Equity Income fund has a goal to achieve a 4% yield. To do 4% today in the US means a pretty limited pool - utilities (and many of those are less than 4%), MLPs, and some distressed stocks. So for our "US" version of Neil Woodford portfolio I will use a range around 2.5% instead of 4% to account for the lower base of the overall US market.

The most challenging parts of cloning Woodford's approach for a US investor is right at the top. Woodford has positioned for a slow/low/no growth world with a lot of healthcare. Three of his top ten and two of the top three are big pharmas that pay excellent dividends - AstraZeneca, GlaxoSmithKline, and Roche. That group averages a 4.4% yield,  hard to come by these days from anywhere much less excellent, wide moat companies like these.  The best US proxies I can think of are JNJ, Merck, and Baxter. These companies can deliver a lot of quality, but they cannot deliver the same yield as Woodford's bunch, they only amount to a 3% average yield.

Next up, Consumer, which in Woodford's portfolio means tobacco. Three big international tobacco companies - Imperial Tobacco, British American Tobacco and Reynolds American for an average yield of 4.2%. We can draft Reynolds onto US Woodford plus add Altria and Phillip Morris, and we get a 4.2% yield as well. Given that the US market offers lower yields, the tie goes to US Woodford.

Woodford added BT after a spell of not owning much in the way of Telcos (another traditional dividend haven). Here the US Woodford is in a good position Verizon yields more than BT.

For industrials, Woodford holds Capita and BAE, defense and utilities have long been stalwarts in his holdings. The average yield here is 3.3%. Unlike pharma, this is a fairly fertile area in the US for dividend seekers, I did not have trouble finding quality companies with solid yields, and I could have gone into pipelines, REITs and other sectors, but sticking with the same kind of construction - Southern Company, GE, and Lockheed combine for an average 3.7% yield.

Sector Woodford US Woodford
Pharma AstraZeneca (4.2% yld)
GSK (5.6%)
Roche (3.3%)
Johnson & Johnson (2.8%)
Merck (3.1%)
Baxter (3.1%)
Consumer Imperial Tobacco (4.5%)
British American Tobacco (4.4%)
Reynolds American (3.8%)
Altria (3.8%)
Reynolds American (3.8%)
Phillip Morris (4.9%)
Telco BT (2.7%) Verizon (4.4%)
Industrials Capita (2.5%)
BAE (4%)
Southern Company (4.7%)
GE (3.5%)
Lockheed Martin (2.9%)

Overall, Woodford's fundamental approach to both stock selection and stock sectors to avoid (energy, financials, tech) looks to travel across the Atlantic very well. Outside of pharma there are rough US equivalents that deliver similar and in some cases arguably better characteristics. Hybrids are the strongest plants in nature, why not plant a British tree or two in the US. What do you think of the selections? Which ones would you choose to make a US Woodford clone?

1 comment:

  1. Really nice idea, Gunnar! May have to take a look at this in the broader European markets!