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Neil Woodford has bought into the UK banking sector he is famed for shunning during the financial crisis, snapping up shares in Lloyds (LLOY), while selling GlaxoSmithKline (GSK), the pharmaceutical giant he has owned for more than 15 years.
Woodford has bought a £207 million stake in the bank for his £10.1 billion Woodford Equity Income fund, with the stock sitting just outside his top 10 holdings.
'We view Lloyds as a well-managed bank with a conservative approach to its balance sheet. Its valuation looks very attractive in our view, and it has the ability to pay a very healthy and growing dividend,' said Woodford Investment Management in an update to investors.
'For most of the post-financial crisis period, the UK banking system hasn't been functioning normally because it has been in a prolonged process of rehabilitation - rebuilding capital and slowly recognising losses that were incurred during the crisis.
'Importantly, that process now appears to be largely complete in the UK, as evidenced by the recent pick-up in bank lending activity and, although the banks will likely continue to rebuild capital, the domestic banking sector looks more attractive as an investment proposition than it has in many years.'
Barring his investment in HSBC (HSBC) towards the end of his time at Invesco Perpetual, a position replicated in his Woodford Equity Income fund but then sold shortly after launch, the Lloyds investment marks Woodford's first foray into high street banking since before the financial crisis.
Woodford's shunning of the banks in 2008, alongside his refusal to be drawn into the dotcom bubble at the turn of the century, are the two crucial investment calls on which the manager has built his reputation.
But he had given signals earlier this year that he was preparing to buy back into banks, hailing Lloyds as 'broadly repaired' and claiming banks looked 'more investable than they have been for a long time'.
The manager has meanwhile dumped his £640 million stake in GlaxoSmithKline after 15 years as an investor, having failed in his attempts to press for a break-up of the business, citing concerns about the one bright spot of its business, its HIV franchise.
'Over a holding period of more than 15 years, I have consistently believed that GlaxoSmithKline was capable of delivering growth and realising shareholder value,' he said. 'Neither has been forthcoming to the extent that I had hoped and expected.'
He said investing in GlaxoSmithKline had been a 'frustrating experience', describing its pharmaceuticals, consumer healthcare and vaccines divisions as 'perennial underperformers'.
Woodford said he was acting on fears about its HIV business. 'I have become more concerned about the prospects for the one Glaxo engine that has been firing on all cylinders,' he said, pointing to the potential threat of rival drugs from US biotech firm Gilead (GLD.O).
The manager has long agitated for a break-up of the business, but said he had been 'ultimately ignored – repeatedly' by previous chief executives Jean-Pierre Garnier and Andrew Witty.
With Emma Walmsley having taken over as chief executive last month, having portrayed herself as the 'continuity candidate', Woodford said the prospect of a break-up 'now looks more remote than ever'.
'My base assumption now... is that Glaxo remains a healthcare conglomerate with a sub-optimal business strategy, and shareholders face a cut to the dividend. These characteristics do not appeal to me as an investor.'
Woodford has quickly put the GlaxoSmithKline money to work, buying a host of cyclical UK stocks focused on the domestic economy, in a 'strategic shift' based on his view that the UK economy is better placed than most believe.
'I'm more bullish about the domestic economy than consensus and at the same time that bearish consensus on the UK has resulted in very big share price falls in some domestic cyclical sectors and that's offered up some very interesting opportunities,' he said.
Stocks he has bought for the fund in April include:
Woodford said exposure to domestic 'cyclical' stocks, whose fate is more strongly tied of the UK economy, now made up around 30% of the fund.
'It is the first time in a long time that you've seen a move of this type in the portfolio,' he said. 'But I have in the past been very exposed to domestic cyclicals. I have in the past had very big weightings to banks. Not for a very long time but I've had those sorts of exposures before. And then in many ways this is a repeat of what the portfolio looked like in periods gone by.'
The move represents a doubling down on the sector of the market that has most hurt Woodford over the last year. The Woodford Equity Income fund remains the top performer in the UK Equity Income sector since its launch in June 2014, but over the last 12 months ranks 72nd of 83 funds, with the manager's major UK domestic holdings, like Capita (CPI) and Next (NXT) the biggest drags on performance as they were hit hard by the Brexit vote.