Woodford, who runs the Edinburgh Investment Trust and the Invesco Perpetual Income and High Income funds, says that the rally in defensive stocks over the past 12 months is unlikely to continue now that many undervalued areas have re-rated. "This year's rise in the stock market has been noteworthy for its breadth," he said. "While previous rallies have been driven by a relatively small number of 'risk-on' sectors, notably mining and banks, this year has seen strong performances from a wide spread of sectors, including those perceived as defensive."
"Investors have favoured stocks where they have confidence in their dividend-paying ability and the prospect of sustainable growth."
"The stock market has begun to recognise that the shares of some companies that have these attributes were profoundly undervalued, as we have believed for some while, and this has benefited the portfolio's performance."
"We would caution, however, that returns over the next three years are likely to be somewhat lower than over the last three years, purely as a consequence of the higher valuations that we now see in our market," he added.
Woodford’s views chime with those of a number of managers who have spoken to FE Trustnet in recent months.
Recently Standard Life’s Thomas Moore said large cap defensives have become too expensive and investors need to be selective with their equity income exposure.
FE Research analyst Charles Younes agreed with him, adding that Woodford’s decision to leave his huge income funds could have been influenced by this.
Woodford warns that the tapering of quantitative easing is inevitable and remains a threat to investors that is hard to quantify. He adds that easy monetary policy has been one of the major drivers of stock market performance recently.
"Further confirmation of the extent to which the stock market's progress has been driven by quantitative easing came over the period [to 30 September], most recently with the market's positive reaction to the news of no imminent tapering in the US," he said.
"There are many explanations as to why the Federal Reserve chose not to commence tapering in September, as had been widely expected, but the most popular view suggests that the Fed was concerned that the political impasse could have an increasingly negative impact on economic confidence and market sentiment."
"Although the timing is impossible to predict, the withdrawal of extraordinary monetary policy in the US is ultimately inevitable."
"We expect the pace of withdrawal to be gradual but, like the US Federal Reserve, we do worry about the near-term implications of tapering for our asset class," he said.
Woodford’s Edinburgh Investment Trust has seen strong NAV gains over the past year, amounting to 29.7 per cent. This is substantially more than the 21.17 per cent made by the FTSE.
However, share price returns have been more modest, at 21.27 per cent almost level with the index’s gains.
This is partly due to Woodford’s decision to leave Invesco next year, which has thrown his position as manager of the trust into doubt and pushed the portfolio onto a 2.2 per cent discount from a consistent premium.
Performance of trust vs sector and benchmark over 1yr
Source: FE Analytics
The board has addressed the issue in the half-yearly report out today and said that it is keeping its options open.
It hints that it could remain with Invesco, praising the team that works behind the scenes with Woodford.
"The board would like to take some time to consider the options for the future management of the company before it makes a decision, but in the meantime it is satisfied with the assurances that have been received from Invesco Perpetual," it wrote.
"The board is also mindful that, as has been the case since we appointed Invesco Perpetual, working with Neil Woodford is a highly experienced investment team backed by the resources of a global company."
Woodford took over the fund in September 2008 and his tenure has been very good for shareholders.
Our data shows the trust has made 108.21 per cent in total return share price terms compared with total returns of just 60.19 per cent on the FTSE.
Performance of trust vs sector and benchmark since Sep 2008
Source: FE Analytics
Numis analyst Ewan Lovett-Turner says the most likely outcome is that the board invites offers from various managers.
"The most likely outcome, in our view, is that the board will hold a beauty parade at some stage: this could involve Invesco Perpetual, Neil Woodford's new management company, as well as other management groups," he said.
"The ability to move the fund to a new manager is a unique feature of the investment trust sector and the board of Edinburgh IT has been active in demonstrating its independence in the past by moving from Edinburgh FM to Fidelity in August 2002, and then to Invesco Perpetual in September 2008."
Ongoing charges on the trust are 0.7 per cent prior to the application of a performance fee. All told, charges were 1.93 per cent in March, according to the AIC.
