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The Wages of Sin?

Neil Woodford's portfolio for the new CF Woodford Equity Income Fund, announced in full this Woodford latestmorning, has all the makings of an excellent prospect for investors of every type. Billed as an essentially cautious fund, it combines a vivid mix of holdings that appear to have been exquisitely judged and balanced. 

But, as one of my colleagues commented last week when the top ten holdings were announced, it was a bit surprising in one way. There really did seem to be quite a lot of focus on booze, fags and drugs, didn't there? How are we supposed to persuade our clients that this is the way forward, especially at a time when the first two are becoming increasuingly identified as public enemies four and five – some distance behind Isis, Jimmy Savile and TV soccer overload, admittedly, but still well up there among the things we're supposed to be cutting down on.

Thinking Without Prejudice

Answer, of course: because of China, and India too. Oh, and South America, I suppose, if you haven't heard enough of that place recently to last you for a while yet. All of them have rapidly growing consumer markets which are desperately craving not just chemical satisfaction, but  top luxury-branded western chemical satisfaction in vast quantities. Like it or not – and many won't – there's gold in them thar ills.

The pharmaceutical industry is another ballpark, admittedly. There are plenty of ethical funds that won't touch a drugs company that dabbles in genetic modification of any sort. And, to surprisingly many, human genetics and IVF are a no-go area for those who believe that we should leave the world the way that nature made it. But globally, big pharma is now emerging from a decade-long slump that has seen spending on new treatments curtailed and a general shortage of new products in the pipeline.

I was talking last weekend to a British acquaintance who worked till last year as a pharmaceuticals project manager for Pfizer – still the source of much parliamentary mistrust of its reputation for asset-stripping, and the failed acquirer of AstraZeneca. (For another nine months, probably, at which point it can have another go.)

Anyway, this acquaintance gave me the not very market-sensitive information that, although the big companies are still buying up bright young biotech start-ups as fast as they can, they are once again putting real money into original research. That's a change in the wind, of which not everyone is yet aware.

Woodford is well aware of it, you can rely on that. And he also knows that it'll only be the giant companies that can afford the billions of dollars needed to put a new product through the four-year approvals processes that so many advanced drugs seem to require. 

Caution Isn't Always What You Expect

But back to this morning's press release: 

The fund’s top 10 holdings highlight significant emphasis on the pharmaceutical and tobacco sectors. Neil Woodford believes that the fund’s investments within these two sectors will be resilient in the face of a general weakening economic environment – they have strong balance sheets and attractive valuations. These themes are reflected across the portfolio.

Precisely. Woodford's fund probably won't win approval from every ethically-oriented manager – and that includes a lot of pension funds, remember – but between you and me, I doubt that it'll stand in his way.

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