Neil Woodford has defended his continued investment in FTSE 100 outsourcer Capita, despite the shares failing to rebound after falling by more than 40 per cent on the last day of January following a profit warning.
Capita's shares are down from £4.87 a year ago to the current price of £1.71 - a total fall of nearly 65 per cent.
In a statement on his company’s website, Mr Woodford said that on 24 January Capita accounted for 0.8 per cent of the capital in his £7.7bn Woodford Equity Income fund, and 1.3 per cent of the capital in the £689m Woodford Income Focus fund.
Mr Woodford said Capita "has been a poor investment, but it is one that has the capacity to become a significantly better one from here".
"There is much work to be done to turn the business around, but there is a clear plan and the project is underway.
"Discussions with all major customers have gone very well as have conversations with the Cabinet Office.
"The collapse of Carillion has catalysed the whole outsourcing sector to rebase its relationship with the Government, which also recognises the need for change, to reflect a fairer balance between risk and reward.
"I would go as far as to say that the business will be in better shape at the end of 2018 than it was in 2016. It will have infinitely better leadership, a stronger balance sheet, better cash flow, more conservative accounting policies and a lower pension deficit.”
He said the "mistake" he made, "albeit I didn’t know it at the time", was in owning Capita in 2016.
"It is not a mistake to own it now. And so, I will not be compounding the previous error by behaving in an irrational and valuation insensitive way now.”
Turning to what he believes are the future prospects for the company he said this is "a complete reset for Capita".
"The new chief executive has mapped out a clear new direction for the business and it is one with which I completely agree. More focus, better leadership, better cost control, a stronger balance sheet (through a combination of disposals, dividend cut and a future capital raise) which will, in turn, lead to more investment in the business, an enhanced competitive position and a brighter future for its shareholders and customers."
Mr Woodford attributed the share price fall to this "reset", and because "Capita represents many of the things that this market loathes at the moment – it is exposed to the UK economy, it has a recent record of disappointment, it is an outsourcer".
The fund manager branded current valuations "irrelevant – it simply does not matter in the stock market at the moment".
"The only question that ultimately matters to me when forming an investment judgement, is ‘what is the company worth?’. On that basis, it strikes me that a decision to sell Capita here is almost impossible to justify from a fundamentally-based perspective.”
His travails as a shareholder in Capita are just the latest in a litany of woes for Mr Woodford and the investors in his funds.
His flagship Woodford Equity Income fund has shrunk in size by almost £2bn in the past year, having lost 2.2 per cent over the past year, compared with a gain of over 9 per cent for the average fund in the IA UK Equity Income sector in the past year.
Mr Woodford blamed his fund's lack lustre performance on a stock market "totally preoccupied with momentum and insensitive to valuation".
"I will underperform in such market conditions as I have done before," he said.
"Equally, however, we should expect rationality to return in an unpredictable way, as it has done always in the past.
"When this happens, share prices will adjust to reflect reality in the economy and in the businesses that thrive and prosper within it. In the meantime, I would be doing you, my investors, a massive injustice if I was to abandon the investment discipline that has guided me for 30 years in this industry.”
David.Thorpe@ft.com
