Woodford Confident Changing Investment Backdrop Will Bolster Poorly-performing Funds

Commenting in his latest year-to-date roundup, Woodford said he expects the investment backdrop to look "very different to the one that has prevailed for the last two years", outlining a number of changes he anticipates will take place over the course of 2018. 

He also said he is confident that his funds - the flagship £7bn Woodford Equity Income fund, the £675m Income Focus fund and the £625m Patient Capital trust - are positioned appropriately to respond to these changes.

The manager has been under pressure in recent years as his funds have fallen behind their peers and benchmarks. Over three years to 2 March, the Equity Income fund has returned just 1%, underperforming both the IA UK Equity Income sector average return of 15% and the FTSE All Share benchmark's return of 17% during the same period, according to FE.

Meanwhile, the share price of the Patient Capital trust has fallen to a record low as investors have become frustrated with the performance and sold their holdings. The NAV of the fund, which launched in April 2015, has fallen 10% over one year and 13% over six months.

The performance is being dragged down by large listed holdings such as US biotech company Prothena, reports The FT. It is now trading on a 13% discount according to Winterflood.

Valuation stretch to normalise

Woodford said the bubble-like characteristics currently present in financial markets "add considerable risk to the investment backdrop" and the elastic between the valuations of popular stocks, such as US internet companies, and unpopular stocks, such as those in the healthcare sector, has reached a "breaking point".

He said: "We believe this will reverse in 2018, partly as a result of the macroeconomic conditions described elsewhere on these pages, but also because fundamentals always eventually have a gravitational effect, which pulls share prices into closer alignment with reality.

"Timing this outcome, or pinpointing a specific event that will trigger it, is not possible but neither is it necessary. It is an inevitable consequence of the way that financial markets work and have always worked - fundamentals matter in the long run."

Woodford added his funds are positioned to exploit the opportunity that will arise when this bubble bursts, as it is invested in domestically-focused stocks which have become "profoundly unloved and undervalued".

He said: "It is a simple mantra but all we are trying to do is avoid the risk and capture the opportunity. This leaves us confident of delivering attractive and positive long-term returns, even when the market corrects, an event which we now view as inevitable."

Improving UK economy

Another theme the manager is excited to exploit is improving fundamentals within the UK economy. He said the market consensus has "misread the outlook" for the region as it believes fundamentals are deteriorating.

"We see UK economic health improving, with more people in work, more wage growth, less inflation, more investment spending, better public finances and a continued recovery in manufacturing and exports," he said.

Woodford unveils Income Focus portfolio and takes advantage of 'attractive domestic opportunity'

"We expect the UK economy to grow by around 2% this year - a considerably better outcome than the recession that some of the more pessimistic commentators are forecasting and what appears to be priced in to valuations.

"It will also compare very favourably with the apparently ‘booming' European economy, which will probably be growing at approximately the same rate."

In relation to his portfolios, the manager said his exposure to companies that are UK-focused such as housebuilders, construction businesses and retailers will bode well, as he feels valuations and growth expectations are "far too low".