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Woodford sticks to defensives

FUNDS: Top UK fund manager rules out quick recovery, while pointing out that the companies best equipped to deal with the economic environment are currently the cheapest in the market
July 22, 2009

Neil Woodford, the UK's most successful fund manager, has poured cold water on recent 'green shoots' reports, predicting no "meaningful" recovery for the UK economy for three to four years.

Mr Woodford manages the UK's two biggest investment funds - Invesco Perpetual High Income (£7.9bn) and Invesco Perpetual Income (£5.7bn). A consistent top performer, he is one of only a handful of fund managers who correctly forecast the credit crunch, exiting bank shares before the crash, and previously forged his reputation by refusing to buy into the dot com boom.

Mr Woodford has been defensively positioned since the banking sector's collapse, meaning he missed out on the spring stock market rally. But he makes clear in a note this week that he is sticking to classic defensive investments, believing that the perceived 'green shoots' that propelled equity markets higher from their March lows have "already started to look illusory".

"The consumer boom, built on easy access to credit, the housing market bubble and the excessive risk and leverage adopted by banks all grew over a number of years. These massive imbalances built through the extended boom phase of the economic cycle, and just as they took a long time to build, they will also take some time to address. This has only just started to happen and it will be a painful and unavoidable process for the UK economy that precludes near-term recovery," he says.

He also points to high and rising unemployment as "starving the economy of support from the consumer, which has been integral to growth in recent years".

Pointing to pharmaceuticals, utilities, tobacco and telecoms as the place to be, for their sustainable earnings and dividend growth, he argues that "such dependability deserves a valuation premium compared to the rest of the market", but, instead, they currently trade at a substantial discount.

"History suggests that this discount will not persist for long," he warns. "When looking at companies in sectors like pharmaceuticals and tobacco, many are trading on earnings multiples that do not reflect the fundamental qualities of their businesses. I believe that their ability to grow profits, cash flows and dividends has been overlooked, but as the scale of the challenges facing the economy becomes clearer, I think this will change."