Woodford’s avoidance of mining stocks may hold a little lesson for passive FTSE investors

29th May 2013

Invesco Perpertual’s star manager Neil Woodford has been discussing his portfolio and some excellent performance on his £1.3bn Edinburgh Investment Trust. He has suggested that at least one secret of his success in the last year has been avoiding mining stocks with a weighting of zero per cent as trade website Investment Week reports.

He cites the eye-watering write-downs at Rio Tinto – taking a $25bn hit from its $38bn purchase of Alcan since 2007 though he likes all sorts of stocks such as AstraZeneca and Roche and is, as this would suggest, overweight in big pharma.

With mining stocks so heavily out of favour, it will be interesting to watch the views of other fund managers as the firms try and improve their dreadful reputation. Some may even be bullish. But that isn’t the main point for Mindful Money at the moment. For those UK investors who follow passive strategies or see something like a FTSE 100 or All Share tracker at the core of their portfolio, the presence of so many mining stocks in the big indices might give some pause for thought.

First of all many UK listed miners have very limited UK exposure, if any, so they do not represent much of a domestic investment but a commodity play often linked to China – just the week the subject of an economic downgrade. They do have to subscribe to UK standards of disclosure and governance but one might argue that the UK standards of disclosure and governance could do with more than a little tightening. Given that the strange post financial crisis world has presented investors with a number of investment ‘no brainers’, it is interesting to see what buying an index gets you.

We are not saying you should definitely abandon your tracker, but there is a whole range of passive plus strategies that give you low cost exposure but with a little bit of intelligent asset allocation too. Then again, you might just buy Mr Woodford’s investment trust instead.

14 thoughts on “Woodford’s avoidance of mining stocks may hold a little lesson for passive FTSE investors”

  1. Anonymous says:

    Hi Shaun

    Properties fell over 50% in the USA, Spain etc. 85% LTV – valuation fees paid by buyers needing finance. what could go wrong ?

    1. Noo 2 Economics says:

      Was exactly like that when I bought in 1987 Expat. Valuer was appointed by Building Society and I had to pay him, if I didn’t accept and pay him no mortgage – simple as that. He demanded to know ask price before proceeding with valuation. Valuation came back at 80% of ask price, when queried he said he only valued bricks and mortar.

      Clearly on the side of the Building Society then even though I was paying him – things are not always as simple as they appear.

      1. Anonymous says:

        A building society who will hold the mortgage has vested interest in making sure they can sell at “book value”.

        In contrast, the 2000s US boom had investment banks packaging up bundles of liars loans for onward sale. Nobody in the chain had any incentive to keep valuations down to a sensible repossession resale price.

  2. dutch says:

    ‘Their assumption that a cut in interest-rates will boost inflation is in my view somewhat dubious.’

    it seems guranteed to induce asset inflation.a price to pay for reversing a widening trade deficit

    1. Anonymous says:

      Hi Dutch

      Yes which is why the various establishments and elites go to so much trouble to avoid having asset prices in consumer inflation indices. After all it is awkward for them when they are in effect telling equity holders and home owners they are richer to have worries that it is in effect inflationary!

  3. Noo 2 Economics says:

    I think Sweden’s problems are directly linked to the Eurozone as 70% ish of it’s exports go there, until the EZ problem is resolved Sweden remains a hostage to the EZ’s fortunes – the dark side of having a positive balance of payments.

    1. Anonymous says:

      Hi Noo2

      The list of countries that are hostage to the Euro area’s fortunes is growing. Even Switzerland got sucked in as the Swiss Franc surged and it had to take action. This also via the Carry Trade caused problems for the foreign currency mortgages in Eastern Europe. Only this week Erste Bank had another “surprise” which would be no surprise at all to those who read my post of 1110/11.

      Now Sweden joins the list of those struggling via an appreciating currency. It makes me think who else has an appreciating currency? Oh yes the UK…

      Will the Euro area “export” negative interest-rates to the UK?

  4. Anonymous says:

    Very interesting, Shaun. I hadn’t heard anything about what the Riksbank did until I read your column.

    One thing regarding the Swedish CPI. When you write: ” if house price inflation was more directly reflected in Sweden’s consumer inflation numbers they would not be anything like as low would they” I suppose you just mean that if the Swedish CPI had a net acquisitions approach to owner-occupied housing their inflation would be a lot higher. However, the Swedish CPI does already include house prices in its mortgage interest component, which is really more like a component for mortgage interest and the opportunity cost of owner’s equity in the home. This is why, as you noted, the change in the interest rate has such a big impact on the CPI. Depreciation is a component, as in the RPI, but an index of repair costs is used to measure it for some reason, not a house price series as in the RPI or a dwelling price series as in the Canadian CPI. The attached paper by Klevmarken et al contains a description of the existing method along with a proposed method:


    As far as I know this proposed method has not been implemented, so the method described still obtains. It also only applies to owner-occupied houses. OOH costs for owners of condominium apartments are proxied using imputed rents.

    I have spent a lot of time studying actual and proposed Swedish indexes for OOH and it always gives me a headache. If someone were looking for a good way to calculate OOH costs in an upratings index, they would be far better to imitate the UK RPI than the Swedish CPI. Andrew Baldwin

    1. Anonymous says:

      Hi Andrew

      As an EU citizen so to speak then Sweden will have a Eurostat style OOH index from September. Should the fall in mortgage rates stimulate the housing market further then it will provide some interesting answers to say the least…

      Thanks for the link and the information. If we project it forwards then we could reasonably expect such proposed changes to be having more of an effect now via higher weights. As to the current Swedish CPI methodology I had taken a look and noted that it was similar to the RPI and take on board your critique that it is in fact an inferior version of it.

      As well as the methodology I noted the results because CPI (with a housing element) is at -0.2% whereas HICP is at 0.1%. In a house price boom? Oh dear…..

      1. Anonymous says:

        Thank you for your reply, Shaun. An inferior version of the RPI methodology for OOH would be a good way to describe the Swedish OOH component for houses, with a CPIH treatment extended to owned flats.
        “Oh dear” is right. The Swedish house price index was up by 7,0% from 2012Q4 to 2013Q4. (There must be something more current available but I couldn’t find it.) The Swedish Riksbank will be foolish if it doesn’t look at switching to the Swedish HICP with the new OOH component tacked onto it as their target inflation indicator. It would be a way better inflation measure than their existing CPI.

  5. Ian says:

    The bank has to create inflation otherwise the whole thing collapses.

  6. Forbin says:

    oh dear when I read

    Maginot Line – I read Maggot line

    “The “first line of defense” is making the financial system more resilient …”

    They dont say ! Its a bit late isn’t it? brings to mind horse>bolted>lock gate !

    2 nd thoughts – hang on if they are moving to “regulate” more and we’re at “emergency ” interest rates ( with Sweden joining us) , then this poses the question – why ? The banks are still bust then ? After all that money they’ve had? Really ?

    3rd thoughts – the Banks have been “rescued” then , sort of, see above , and if they merge then what?

    I dont elect BoE Carnival , I should then, shouldn’t I ?

    Then what again for “free” markets ? These questions are more than economics I know but what you suggest / posit means the end of Western Democracy , atleast from this seat ….

    Grabs another bag of popcorn …..


    PS: I dont expect Shaun to answer the political questions but from an economics front this looks rather diasterous

  7. Noo 2 Economics says:

    “what you suggest / posit means the end of Western Democracy” we’re already there Forbin, arrived in 2008.

  8. Anonymous says:

    Hi Guys

    I think that events- not only are central banks using a lot of powers but they are about to use even more- reinforces my argument that they should stand for election. Currently elected politicians are taking responsibility for ever less whilst unelected central bankers are taking responsibility for ever more. It is definitely an anti-democratic theme.

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