Neil Woodford has been buying the shares of tobacco company Imperial Brands, the shares of which have fallen by 20 per cent over the past year.
The fund manager said the earnings achieved by Imperial Brands mean the shares are presently at a valuation as low as during the dot com boom and the financial crisis.
Imperial hit a year high in April at £39.33. The stock is now trading at £31.00.
Tobacco company shares tend to do poorly when the investors are optimistic and markets are performing well - like now - because investors ascribe less value to the defensive quality of tobacco company earning when the market performing strongly.
Instead they buy companies in more cyclical areas, such as mining and oil, which perform better in rising markets, as they have done recently.
But Mr Woodford said Imperial Brands has been a "spectacularly good long-term investment", with share price performance being underpinned by strong and dependable growth in cash flow, earnings and dividend.
"Past performance is not necessarily a reliable guide to the future, but from our perspective, the investment case has not changed dramatically.
"What has changed recently, is the stock market’s level of interest in the investment case – it simply does not fit with the current market zeitgeist, and consequently, its share price has declined by almost 20 per cent over the last twelve months.”
The shares are held in the Woodford Equity Income fund, which has hemorrhaged cash this year, and, according to FE Analytics, has assets of £8.4bn on 21 November, having been over £10bn earlier in 2017.
The fund manager has seen Jupiter and Aviva withdraw mandates from him in recent months.
Woodford Equity Income has returned 0.31 per cent over the past year to 21 November, compared with a return of 12.29 per cent for the average fund in the sector in the same time period, making it the worst performer from 85 funds.
Mr Woodford said everything happening in markets right now is disagreeable to him, notably the negativity towards the UK economy, and the markets positivity towards the Chinese economy.
He said the market “seems content to ignore” issues that challenge its prevailing, positive narrative.
David.Thorpe@ft.com
