Invesco Perpetual’s Neil Woodford has said he has become more cautious after prices rose sharply on equity markets late last year.
In an update for investors, Mr Woodford - who runs more than £20bn in equity income funds - said the economic environment remained “challenging”.
He said he remained a believer in his more ‘defensive’ holdings - in sectors such as pharmaceuticals and defence - in spite of risk-on strategies performing strongly.
Mr Woodford’s Income fund lost 0.8 per cent in December compared with a rise of 1 per cent by the FTSE All Share index and an average return of 1 per cent for the IMA UK Equity Income sector, the company said.
The manager said the tobacco sector, which the fund has an overweight exposure to, had faced a difficult month in December.
“In an environment where the stockmarket has favoured a ‘risk-on’ strategy, the defensive positioning of the fund has led to its underperforming the rise of the market,” Mr Woodford said.
“The tobacco sector, in which the fund is heavily overwight, endured a challenging month, with the fund’s holdings all delivering negative returns.
“We retain our view that the current valuations do not fully reflect the quality, dependable characteristics that the likes of British American Tobacco, Imperial Tobacco and Reynolds American can bring to a portfolio.”
In spite of December’s underperformance, Mr Woodford’s £9bn Income fund remains second quartile in terms of its returns over the past five years. The fund has gained 18 per cent compared with an IMA UK Equity Income sector average return of 15.9 per cent, according to FE Analytics.
The manager said in the update that his outlook had become more cautious even though markets have risen recently with the FTSE 100 breaking through the psychologically important 6,000 points barrier.
“At a time when the UK stockmarket appears more relaxed about the risks facing the world economy and financial markets, we have become a bit more cautious,” Mr Woodford said.
“The environment is still very challenging in a real sense, but financial markets have been propped up by symptomatic treatment rather than by a cure of the world’s economic problems.
“The gap between reality and perception has therefore widened.”
Elsewhere, Mr Woodford said there was some “positive newsflow” for other holdings, including BAE Systems, which the manager said confirmed a £2.5bn deal to supply Typhoon and Hawk aircraft to Oman.
The manager said G4S, which “endured a tough 2012 on the PR front” following the London 2012 Olympics, was confirmed as a potential supplier to the Department for Work and Pensions.
