In his latest update to investors in the £4.4bn fund, Mr Woodford said the degree to which the fund is exposed to early stage companies had caused "nervousness" among his clients.
He said that in the medium term he will have no exposure to unquoted companies in the equity income fund, and will instead invest in shares in the Patient Capital Investment trust, which he also runs and which was set up as a specialist vehicle to invest in unquoted companies.
The fund manager believes that because the Patient Capital trust is listed and a constituent of the FTSE 250, it will provide liquidity to investors who are worried about this, while also providing exposure to the early stage companies he believes represent a growth opportunity.
He began this process at the start of March by selling some of the unquoted holdings in the Woodford Equity Income fund to Patient Capital, in exchange for shares in the latter.
Mr Woodford promised that the unquoted exposure in the equity income fund would drop below 10 per cent by the end of this year.
He said this would include holdings he has listed on a Guernsey stock exchange. These technically could be counted as listed, though only his stake in the companies is listed, not the rest of the company, and the Guernsey stock exchange has very little trading, so while the holdings do not count as unquoted, they are not very liquid.
Mr Woodford wrote that his interest in these businesses "continues as long as they remain undervalued.".
He has previously stated that there is no lack of liquidity in the fund, despite investors pulling billions out.
When investors withdraw capital at a faster rate than new investors put money in, shares have to be sold to pay those investors heading for the exit.
But as the stakes in the unquoted companies could not easily be sold due to the lack of liquidity, this meant shares in listed companies had to be sold, which increased the proportion of the fund in unquoted holdings.
Commenting on the latest move, Mark Dampier, head of research at Hargreaves Lansdown, said: "We’ve been talking to Woodford Investment Management for some time about the level of less liquid assets in the Equity Income fund, and we think plans to eliminate direct holdings, while retaining some exposure through Woodford Patient Capital Trust, is the right approach.
"The unquoted companies in Woodford Equity Income have been successful investments since the fund was launched, and the plan to reduce exposure means they can still contribute meaningfully to performance, without affecting the fund too negatively if they don’t do well."
Ben Yearsely, director at Shore Financial Planning said: "I am a big fan of unquoted investments in the right structure; Woodford Patient Capital Trust is the right structure, an open ended fund isn’t in my view. So the commitment to reduce the unquoted holdings further in Woodford Equity Income is sensible in my view."
But Brian Dennehy, a financial adviser who runs Fundexpert.co.uk, has said he doesn’t recommend Mr Woodford’s fund because the reputation built by the fund manager was for investing in larger cap companies, and so the Equity Income fund does not mirror the funds he has run successfully in the past.
The Woodford Equity Income fund has lost 6 per cent over the past three years, compared with a gain of 31 per cent for the average fund in the IA UK Equity Income sector in the same time period.
In the update to shareholders Mr Woodford said this is due to the value style of investing, which he favours, being deeply out of favour.
He said: "Although I have experienced some company-specific disappointments, the fund has underperformed primarily because my valuation strategy has been completely out of step with a momentum-driven market.
"As I said earlier, financial markets can for extended periods become detached from valuation fundamentals and whilst they do, fund managers like me appear incapable of delivering good outcomes.
"However, I hope I have demonstrated to you in this note that, in the end, valuation is what drives share prices and returns in the long run and that is why I remain resolutely focused on my strategy.
"I know the valuation disciplines deployed in everything I do professionally, and which guide the construction of the portfolios, will deliver the returns investors expect over the medium and long term."
The value style of investing tends to perform poorly when interest rates and inflation are low. In this climate, investors tend to focus on the rate at which a company is growing, rather than on the valuation of the stock.
Mr Woodford said he believes there will be a number of catalysts that will mean the value style of investing comes back into favour in the UK, including a resolution of Brexit, and that the UK market will then outperform the rest of the world.
He said: "I have been saying for some time now that the world economy would slow and that this will be felt most acutely in Europe, emerging economies and in China.
"There is evidence that this slowing will continue in 2019. And because the US economy will also grow more slowly this year (under the weight of less fiscal stimulus and the lagged effects of last year’s excessive monetary tightening) global growth will slow further in the months ahead.
"This, in turn, will quite obviously raise earnings risk against a backdrop of excessive valuation in markets, a potentially dangerous combination.
"A further headwind for markets, as we approach the summer is a significant deterioration in global US dollar liquidity, which may be the catalyst for a much less benign market environment than that which we have witnessed in the first four months of the year."
david.thorpe@ft.com
