Despite underperforming the market for two years running, Invesco Perpetual's star fund manager Neil Woodford believes his valuation-focused investment process will bear fruit in the long term, maintaining his stance that a structurally inefficient market is opening up a "once-in-a-decade" investment opportunity.
In a live webchat, Mr Woodford who runs the Invesco Perpetual Income and High Income funds, admitted his funds have had a difficult performance relative to market and sector peers.
"My focus on valuation has not chimed with the market's focus on momentum. We have been finding opportunities outside the cyclical story," he said, adding that his portfolio's underperformance over the last two years also reflected an underexposure to the mining sector and mid-caps.
Mr Woodford however maintained that "structural inefficiency" in the stock market was opening up a "once-in-a-decade" investment opportunity. He said the disparity between fundamental value and share price have been stretched to a level he has only witnessed once before in this 25 years of managing money - during the technology bubble.
Admitting that he has been "surprised" that the cyclical rally in the stock market has run for so long and that his focus on stocks undervalued relative to their share price might not have worked in the short term, Mr Woodford said he remained confident that the strategy will work over the long term.
He stressed that his high conviction holdings in defensive sectors most notably telecoms, pharmaceuticals and tobacco was not due to these stocks' "defensiveness" but rather due to their undervaluations. "I focus on valuation which is like gravity - it is a principal influence on markets," he said.
Criticised for having around 25 per cent of his portfolio invested in pharmaceuticals, Mr Woodford defended his high exposure to the sector. "The risks in pharma are well-rehearsed while the opportunity set which includes an aging population, increased prevalence of diseases that these drugs treat and unmet demand from emerging markets are downplayed," he said. Mr Woodford has holdings in AstraZeneca, GlaxoSmithKline, Novartis and Roche.
Meanwhile, Mr Woodford believes an interest rate rise is unlikely given that the UK’s rising inflation is “a function of things outside the control of the MPC”, citing imported food inflation and rising energy costs. He said a rise in interest rate would “crush” an already suffering consumer. Mr Woodford’s sentiments were echoed by M&G fund manager Jim Leaviss, Fidelity manager Ian Spreadbury and Schroder's economist Azad Zangana. Speaking at a debate on inflation, the trio agreed that a hike in rates would be highly unlikely at least until August this year given the pressure on UK households.
