Neil Woodford, Head of Investment and water stocks investor at Invesco Perpetual, has reduced his exposure to the water industry, making approximately £400m worth of recent disposals in the industry’s FTSE 100 companies.
Invesco, has disposed of nearly all of its £320m stake in United Utilities, where it was the biggest shareholder, cutting it from 7.95 per cent to 0.45 per cent. Woodford was previously the biggest equity backer of Britain’s listed water companies.
In September the fund management group, previously the second-biggest shareholder in Severn Trent, reduced its holding to 1.9 per cent. Woodford, who has been investing in water stocks for 20 years, is attributing his move to Ofwat’s new pricing regime which he believes has resulted in an “unacceptable” risk for investors. Earlier in the year he described Ofwat as “dysfunctional”.
Clive Mottram, consultant in the utilities team at international law firm Eversheds, commented:
“There is no doubt that the water sector has largely been a success story over the last 20 years, since its privatisation. Huge investment has taken place, improving the levels of service to customers, whilst delivering on-going efficiencies which have kept water charges at lower levels than would otherwise have been the case.
“At each price review the economic regulator Ofwat requires the water companies to become ever more efficient, and the price review carried out in 2009 and effective from April 2010 was no exception. Over recent weeks, companies have announced their first set of interim results under the new price regime. Underlying pre-tax profits at a number of companies are down.
“The need for the sector to continue its capital investment programme remains high. It is driven in part by European environmental obligations such as the Water Framework Directive and in part by the need for companies to respond to climate change and ensure that they remain able to maintain services during more frequent, severe weather events.
“In order to be able to continue funding the investment programme, it is essential that investor confidence is maintained.
“Ofwat has a part to play in enabling the sector to maintain the confidence of the financial markets, and this is recognised by Ofwat's statutory duty to ensure that water companies are able to finance their functions and to secure reasonable returns on their capital. The sector will be hoping that Ofwat takes note of the recent exit from water by one of its biggest investors, although the next price review remains four years away.”
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