Tuesday, 17 April 2012

Neil Woodford: Why I Sold Tesco

Neil Woodford: Why I Sold Tesco

Barney Hatt

Published in Investing on 16 April 2012

The City super-investor explains why he no longer holds the supermarket.
Neil Woodford has revealed why he sold all of his shares inTesco (LSE: TSCO), despite admitting some reservations with the price trading at a "distressed" valuation.
Mr Woodford, who is possibly the City's most successful fund manager, owned about 167 million Tesco shares before the sale, which at the time represented about 3.4% of his market-thumping Invesco Perpetual Income and High Income funds.
Writing in the Telegraph, Mr Woodford said he placed too much confidence in the business's ability to cope with the economic headwinds:
"Until recently, I believed that food retailers such as Tesco would prove more resilient to the travails of the UK consumer than those that were more reliant on discretionary spending, but Tesco's Christmas trading update earlier this year changed my mind".
"However Tesco's problems are not just down to the difficult consumer environment and with the benefit of hindsight it is evident some of the company's investment decisions in recent years have not created the value that they should have -- or not yet at least."
In January's trading update, Tesco revealed a poor Christmas period and acknowledged rising costs, a move that sparked a 16% share-price fall.
The profit warning, reportedly Tesco's first for at least two decades, spooked the market and investors who backed the stock in the belief food retailers would be a defensive play in the volatile markets.
Mr Woodford explained: "Moves into non-food merchandise and building much bigger stores to cope with an expanding product range seem to have contributed to Tesco's current issues, lessening its defensive qualities."
"Investments overseas in areas such as the US, India and China, have not yet fulfilled their potential or enhanced shareholder returns."
He added another worrying aspect about holding the shares was rivals seizing upon the opportunity to regain market share as Tesco went through a period of transition:
"I have held Tesco shares in my funds for most of the past 20 years, during which time it has proved to be a very successful long-term investment."
"But I now find myself worrying more than ever about the risks -- both macro-economic and business specific risks -- that this investment now entails."
Mr Woodford believes his other holdings are better blue-chip bets, including the UK's fourth-largest supermarket, Wm Morrison (LSE: MRW), which has better growth opportunities in the UK and less exposure to non-food items.
The rest of the proceeds have been recycled into less cyclical businesses, which Mr Woodford believes will reduce the overall economic sensitivity of his Invesco portfolios. 
Indeed, he may have added to smaller holdings such as Smith & Nephew (LSE: SN) andSerco (LSE: SRP), or topped up on old favourites such as GlaxoSmithKline (LSE: GSK) andVodafone (LSE: VOD)
However, at least one master investor is sticking by Tesco.
While Mr Woodford was selling the retailer, Warren Buffett was buying and has now accumulated 508 million Tesco shares, which represent about 5% of the supermarket and roughly 1.5% of the common-stock portfolio within Mr Buffett's Berkshire Hathaway (NYSE: BRK-B.US) conglomerate. You may wish to read this special free report produced by the Fool, which explains why Warren Buffett still rates Tesco as his top UK blue chip!
On Wednesday, Tesco is expected to own up to further trading pressure when it reports its full-year results. Brokers reckon a 2% decline in first-quarter domestic sales may be revealed.

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