Woodford Hopes To Repeat Post-dotcom Bubble Success As He Warns 'so Many Lights Are Flashing Red'

The manager of the £8.2bn Woodford Equity Income fund has once more been focusing on unloved and undervalued stocks as he believes these will benefit when the bubble bursts as it did in the early 2000s.

He said: "Obviously, the late-90s dotcom bubble was a painful period of performance for me but, in the context of history, it was a brief dislocation.

"By focusing resolutely on fundamentals, my funds enjoyed a meaningful period of positive performance when the bubble burst, continuing to rise in value as the market plummeted in 2000 and 2001.

"In the dotcom bubble it was the old economy stocks - today, in the UK stockmarket, it is domestically-focused stocks which have become profoundly unloved and undervalued.

"The funds I manage are positioned to exploit this opportunity and I am utterly convinced it will pay-off when the bubble bursts, which I believe it inevitably will."

Woodford said the current economic climate is the product of "the biggest monetary policy experiment in history" noting that investors have forgotten about risk ten years on from the global financial crisis.

"This is playing out in inflated asset prices and inflated valuations," he added. "Whether it's Bitcoin going through $10,000, European junk bonds yielding less than US Treasuries, historic low levels of volatility or triple- leveraged ETFs attracting gigantic inflows - there are so many lights flashing red that I am losing count.

"The valuation stretch in the stockmarket has increasingly concerned me over the last couple of years and the difference between the performance of value stocks and growth stocks today, is greater than at any stage in stockmarket history."

Woodford: Election outcome has made me 'even more optimistic' on UK

Though he likened the tech bubble to the bubble of today, Woodford said there are more similarities in today's predicament of the 'nifty fifty' bubble in the late 1960s and early 1970s.

He said: "A narrow group of so-called 'one-decision' stocks with dependable growth characteristics enjoyed a run of popularity with investors that took their valuations to extreme, unsustainable levels.

"In a challenging global economic environment, the few stocks that are perceived to be capable of delivering dependable growth have, like in the early-1970s, become very popular but that popularity has manifested itself in extreme and unsustainable valuations.

"A consistent feature of bubbles is that here is always a subset of the market which falls out of favour as investors clamour for the fashionable stocks of the day, providing the fuel to power the bubble on through the final leg of its journey before it bursts," he said. 

The manager warned timing such an event is not easy but there are certain occasions on the horizon that could prompt the market to acknowledge that some parts of the global growth outlook are "nowhere near as benign as it has complacently believed".

He continued: "Investors should be careful chasing the 'zeitgeist'. The temptations and excesses are right here, right now. There is always risk when markets become obsessed and extreme but there is also opportunity - an opportunity to capture assets at incredibly depressed valuations, the likes of which I have only seen two or three times during my 30-year career."