Neil Woodford, manager of the UK-registered Invesco Perpetual High Income Fund, reiterated his view that current valuation anomalies in the post-credit crunch stock market create “one-in-a-decade” investment opportunities.

The fund manager, who recently talked to journalists about his investment views, said he saw an opportunity to exploit mis-pricings of stocks on a par with what happened during the dotcom boom.

The £10.3 billion (around $16.5 billion) fund, which has been running since 1988, has lagged against its peers over 2010 and the previous year. In 2010, it achieved returns of 10.9 per cent, against the UK Equity Income sector of 14.5 per cent; in 2009, while the benchmark had returns of 22.7 per cent, the fund fared less well, at 9.8 per cent. (Source: Trustnet). So what sort of strategies does Woodford have to turn this around?

“The reason we have had a difficult period is because my focus on valuation has not chimed with the market’s focus with momentum,” Woodford said. “It has been difficult to `stick to our knitting’. However, we have a very disciplined approach to investment – we focus on fundamentals; we focus on valuation – and that strategy has not been working in the short term,” he said.

At present, his funds have strong biases towards defensive sectors – such as telecoms and pharmaceuticals – but Woodford argues that he is “very excited about the undervaluation opportunities in these sectors”. His fund also has significant exposure to the tobacco sector, which continues to hold value despite having already delivered strong returns. Over the past 25 years, tobacco returns have produced total returns (capital growth and reinvested dividends) of 9,200 per cent, way ahead of the nearest sector, mining, at just under 6,000 per cent (source: Thompson Financial, as at 31 December).

The fund has high exposure to pharmaceuticals – 25 per cent of the fund’s assets – but Woodford denied this was excessive, given the sector’s potential. “In fact, I am looking to increase our exposure to this sector because this reflects the degree of conviction that I have about the undervaluation of the sector. I have in the past been more concentrated in one particular sector than I am today in pharmaceuticals. For example, during the 1990s I had more than 30 per cent of the portfolio in banks,” he said.