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By Nick Reeve | Published Jun 01, 2012

Woodford warns governments ‘lack tools for recovery’

Invesco Perpetual’s star manager Neil Woodford has warned European governments and central banks may lack the tools to bring about a strong recovery.

In his annual report for the £916.7m Edinburgh investment trust, the equity income star said he did not believe equity markets would fall significantly but markets may continue to undervalue strong companies.

Mr Woodford said: “My view remains that, following this crisis, the economies of the developed world face a period of inevitably lower growth, as the necessary de-leveraging takes place.

“While low interest rates and innovative monetary policy can help offset the negative impact of this de-leveraging, the tools available to central banks and governments are not powerful enough to effect a strong and sustainable recovery.”

Mr Woodford has opened three new holdings in Sanofi, Serco Group and Smith & Nephew in the trust, after taking profits from tobacco and telecoms stocks and selling out of Tesco completely. He also hailed a refocus by the market on company fundamentals in spite of volatility driven by the ongoing turmoil in the eurozone.

“In the previous two years, equity markets were largely driven by momentum, with fundamentals being ignored,” he said. “During the last 12 months, however, fundamentals have started to reassert themselves, with valuation again starting to matter.”

In particular the manager said his long-term favourite sectors tobacco and pharmaceuticals had continued to outperform. His high exposure to stocks such as British American Tobacco, Imperial Tobacco, GlaxoSmithKline and AstraZeneca has helped propel his open-ended Invesco Perpetual Income and Invesco Perpetual High Income funds back to the top quartile of the IMA UK Equity Income sector after a period of underperformance.

The Edinburgh investment trust also benefited from similar positioning. Mr Woodford said tobacco sector valuations “still look attractive”, while GlaxoSmithKline had boosted the price of its shares by buying them back and Swiss pharma firms Roche and Novartis had benefited from the strength of the Swiss franc.

The net asset value of the trust’s investments rose 10.2 per cent over the 12 months to March 31, while its share price rose 12.1 per cent.

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