Despite admitting he had faced some ‘tough times’ recently following the worst year for his strategy since the tech bubble, Neil Woodford has said he expects his stock selection to be vindicated in 2018.
In his first update of the year – which has so far delivered little good news for his funds, with Provident Financial, the source of much of his 2017 misfortune, continuing to plunge last week – Woodford said that a range of challenges would break a recent groundswell of optimism.
In addition to his long-running scepticism about stock valuations, with many major indices trade as close to 20 times earnings, he added a series of macro challenges were visible on the horizon
‘Many of you will be aware that my views on market valuations and the broader macroeconomic conditions have gone against the consensus for a while now – and they remain so,’ Woodford wrote.
‘As we move into 2018, I expect global liquidity to tighten and China’s economy to slow, with both acting as a brake on economic growth and financial asset prices.
‘While there are risks, there are equally opportunities – that is always the case when markets get carried away. I believe the best opportunities lie in UK domestically-focused stocks, a healthcare sector that has endured a prolonged bear market and companies (of all sizes) that have disruptive technologies at their core.’
He added that the comparatively lacklustre performance of UK equites versus global peers would reverse as persistent fears of a domestic slowdown as the country approached Brexit were proved wrong.
‘I expect the UK to defy expectations of a slowdown and for the valuation stretch between the popular and unpopular stocks will begin to reverse.’
He promised to further flesh out his contrarian positioning in future fund updates.
The defiant tone follows a brutal 12 months for the manager, in which a series of core holdings have misfired disastrously. Through the calendar year 2017 this reduced his return in the UK equity income sector to just 1.2% versus a peer average of 11.5%.
The relative underperformance has been bad enough that it has begun to drag down his medium-term figures, on a three year return of 15.7% versus a peer average of 29%.