January 2013: "following Woodford" update.

OK so I'm a bit late with the 3 picks update as I try to assimilate Neil Woodford's decision to offload the High Income Fund's remaining holding in Vodafone (http://blogs.telegraph.co.uk: Investment guru Neil Woodford sells Vodafone despite good results), following the company's recent reporting of disappointing quarterly revenues results. 

In spite of this:
"The company reiterated that it expects adjusted operating profit in the upper range of £11.1bn to £11.9bn for the 2013 financial year, while projecting free cash flow at the lower range of £5.3bn to £5.8bn. 

The results follow market forecasts of “growth deterioration” at the firm and a reliance on Verizon Wireless for revenues. 

Precisely for that reason, it is of import to point out that on the conference call the outfit's Chief Financial Officer, Andy Halford, said Vodafone’s cash-flow will beadequate to cover its future dividend payments. " (http://www.sharecast.com: Vodafone reports decline in quarterly revenues, confirms forecasts -UPDATE).

But, looking at January, it was a good month for all 3 options, as all 3 moved up strongly. 
Perhaps not enough for the 3 picks though which continues to lag the 2 managed options despite recovering quite strongly into a positive position with 3.74% gain to date.
Of the 2 managed options the flagship High Income Fund still leads the way with an 8.56% total gain, just ahead of the Edinburgh Investment Trust's 7.77% gain.

There were no transactions in the month to report.

			Shares	Price	£Value	%Gain
Inv. Perp. High Income			1110.14	5.87	6513.44	8.56%
	Residue				0.00
	Dividends
	Total		6000		6513.44	8.56%
Edinburgh Investment Trust			1182.00	5.30	6264.60	4.41%
	Residue				0.43
	Dividends				200.94
	Total		6000		6465.97	7.77%
3 Picks
BAT			61.00	32.83	2002.63	0.13%
Glaxo			138.00	14.45	1994.10	-0.30%
Vodafone			1191.00	1.72	2049.71	2.49%
	Residue				3.68
	Dividends				174.56
	Total		6000		6224.69	3.74%

Transactions in the month:
	Invesco Perp. High Income			N/A
	Edinburgh Inv. Trust			N/A
	3 Picks			N/A

Chart wise the picture is as follows:

Click to enlarge, close to return

So what to do now about Vodafone where my hand is being forced due to it no longer being a High Income Fund holding.
And, given that the strategy for the 3 picks is based upon selecting an investment from each of the 3 largest sector weightings in the top 10 of the High Income Fund, I now have to sell Vodafone (virtually), and replace it (virtually). 

Looking at the current top 10 as of the 31 January 2013, I can see that the fund is now hugely weighted towards Pharmaceuticals and Tobacco companies which now occupy the Top 6 spots and 39.27% of the whole fund. 
Further, assuming that Tobacco is being classed (here at least), as Consumer Goods then Reckitt Benckiser adds 4.90% to that figure.

Bizarre that the Top 3 holdings are Healthcare companies but the next 3 could be categorised as the antithesis of Healthcare.        

• Top 10 holdings                      %

1. AstraZeneca                         8.94
2. GlaxoSmithKline                  8.21
3. Roche                                    6.22
4. British American Tobacco  5.66
5. Reynolds American             5.29
6. Imperial Tobacco                 4.95
7. BT                                          4.95
8. Reckitt Benckiser                 4.90
9. BAE Systems                       4.78
10. Capita                                    3.73

• Total                                      57.64
• Total number of holdings:  113

The sector breakdown for the whole fund is as follows:

• Breakdown by industry sector   %
• Health Care                             34.25
• Consumer Goods                   21.42
• Industrials                                 20.42
• Utilities                                        8.19
• Financials                                   7.97
• Telecommunications                 5.21
• Consumer Services                  1.63
• Basic Materials                         0.29
• Technology                                0.12
• Unit/Investment Trust/Other      0.12
• Oil & Gas                                   0.02
• Cash                                           0.38
• Total                                         100

Based on the guiding rules so for, that would see me trade Vodafone for.... BT, as Telecoms continue to be the 3rd biggest sector represented in the Top 10.
Not ideal for me at all, as trading Vodafone for BT is not something I would personally choose to do.
Alternatively, the next sector in the top 10, and the 3rd largest weighted sector in the whole fund, would be Industrials as represented by BAE.

So its a coin toss between:

1. sticking to the Top 10 as the primary sector guide and picking BT,
2. using the whole fund as a sector guide and choosing BAE or,
3. a final option would be to pick another from the top 2 weighted sectors in the Top 10.

I was actually quite comfortable retaining Vodafone in this virtual experiment so this is giving me quite a quandary which, it wasn't ever intended to.

I will discount the last option as this will reduce diversification.

But the strategy was for the decisions to be guided by Woodford's actions so I will have to put personal views to one side and go for......BT?

Although it is tempting to go for BAE's higher yield.

I do think that Neil Woodford's current strategy has concentrated things hugely around 2 sectors within the Top 10 so I think it right to add the option of looking at the largest sector weightings in the whole fund as well.

As I first saw this on the published articles on the 11, I'll make the change at today though so thats the 15th Feb.

Related article links:
- http://blogs.telegraph.co.uk: Investment guru Neil Woodford sells Vodafone despite good results
- http://www.sharecast.com: Vodafone reports decline in quarterly revenues, confirms forecasts -UPDATE
- http://www.fool.co.uk: Woodford's Invesco Perpetual fund sells its stake in Vodafone Group plc (LON:VOD).
- http://www.invescoperpetual.co.uk: Invesco Perpetual High Income Fund