Neil Woodford, the UK’s most high-profile fund manager, has said he believes stock markets around the world are in a “bubble” which when it bursts could prove “even bigger and more dangerous” than some of the worst market crashes in history.
The founder of Woodford Investment Management, which manages £15bn of assets, warned investors to be wary of “extreme and unsustainable valuations” in an interview with the Financial Times, likening the level of risk to the dotcom bubble of the early 2000s.
“Ten years on from the global financial crisis, we are witnessing the product of the biggest monetary policy experiment in history,” he said. “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.”
He said this was why he was staying out of a host of expensive “zeitgeist” stocks, instead buying UK-focused housebuilders, retailers and banks whose share prices are discounting “economic Armageddon for the UK economy” following the Brexit vote.
Mr Woodford shunned bank shares before the 2007 financial crisis and stayed out of the tech sector before the dotcom crash. Both hurt the performance of his funds in the short term, but ultimately cemented his reputation as one of the UK’s most revered money managers.
“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.”
Nevertheless, his flagship £8bn equity income fund is currently ranking as the worst-performing fund in its peer group over one year and has recently lost several high-profile mandates. Its period of stark underperformance has included two profit warnings at lender Provident Financial, which Mr Woodford described as “a major blow-up that we are in the process of rehabilitating”.
He has been steadily raising his contrarian stake in the UK. Between September 2015 and October 2017, the proportion of the portfolio’s revenues derived from the UK increased from 41.9 per cent to 55.5 per cent.
In the interview, Mr Woodford admitted that his investment strategy has put him in “the most uncomfortable position I have been in during my career”. He added: “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 spoke of the growing gulf between the prices investors are willing to pay for income stocks perceived as safe and dependable, and “unfashionable” stocks exposed to the UK economy, including early-stage businesses that are the target of his Patient Capital Trust.
“There 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.
“In a challenging global economic environment, the few stocks that are perceived to be capable of delivering dependable growth have, as in the early 1970s, become very popular but that popularity has manifested itself in extreme and unsustainable valuations. The market appears to be making the same mistakes again, but this time the bubble has grown even bigger and even more dangerous.”
Click here to read the full interview with Neil Woodford
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