Woodford: ‘utterly convinced’ strategy will pay off when bubble bursts

Neil Woodford believes his recent move toward domestic stocks will be vindicated when the current stock market bubble finally bursts.

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In an interview with the Financial Times, the mega fund manager defended his contrarian calls on domestic sectors, in light of an imminent market crash “even bigger and more dangerous” than some of history’s most catastrophic downturns.

He told the paper that global stock markets are in a “bubble” with risk levels not dissimilar to the dotcom bubble of the early 2000’s.

Current valuations have reached “extreme and unsustainable” and are a byproduct of 10 years of quantitative easing, “the biggest monetary policy experiment in history,” Woodford explained.

“Investors have forgotten about risk and this is playing out in inflated asset prices and inflated valuations.

“Whether it’s bitcoin going through $10,000, European junk bonds yielding less than US Treasuries, historic low levels of volatility or triple-leveraged exchange traded funds attracting gigantic inflows — there are so many lights flashing red that I am losing count.”

This year, the Woodford Investment Management founder who looks after £15bn of assets, has made a string of contrarian calls, betting on the domestic housebuilders, Britain’s biggest retail banks and ridding his portfolio of more defensive consumer staples like British American Tobacco.

Performance-wise, both his flagship equity income fund and Patient Capital Trust have endured a painful year, putting Woodford in what he has described as “the most uncomfortable position I have been in during my career”.

The CF Woodford Equity Income Fund, which has been battered by profit warnings from several of its biggest holdings, is currently the bottom performing fund in the Investment Association UK Equity Income category, returning just 1.5% against the sector’s 12.6%.

The rocky performance of his biggest fund has prompted Jupiter Merlin, Aviva and most recently Architas to pull their investments in the span of a few months.

And fund flow data from Morningstar suggests redemptions from Woodford’s £8.3bn fund and Mark Barnett’s trio of Invesco Perpetual UK equity income strategies are the reason for the category’s consecutive negative net sales in recent months.

His Patient Capital Trust is also trailing its respective benchmark, the IA UK All Companies sector, with net asset value down at -6.9% and suffered a major setback when its largest holding bio tech firm Prothena saw its shares tank this month.

However, the UK’s highest-profile manager said his strategy of avoiding the expensive “zeitgeist” stocks in favour of the discounted banks and retailers would be vindicated after this latest post-dotcom bubble bursts.

“I don’t know when I’m going to be proved right, but I’m utterly convinced that I am right, as I have been right before,” he told the FT.

“In the dotcom bubble it was the old economy stocks which became profoundly unloved and undervalued and today in the UK stock market, it is domestically-focused stocks,” he said. “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.”

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