Woodford: Investors have lost faith in the mining sector

Invesco Perpetual’s Neil Woodford, manager of the group’s £25bn suite of UK income products, has described his heavy underweight position to the mining sector as one of the biggest drivers behind his outperformance over the past year.

Woodford, writing to shareholders as his £1.3bn Edinburgh investment trust reported its results for the full year to March 2013, said risk-on investors are starting to sell out of the sector.

He said investors have lost faith as mining companies continue to erode investor capital by embarking on aggressive acquisition sprees.

He said his zero weighting to the sector is one of the factors behind the trust outperforming the FTSE All Share over the year to the end of March, delivering a 22.4% NAV return, ahead its benchmark return of 16.8%.

“The company’s zero weighting in the mining sector provided another positive impact on performance,” said Woodford

“This is a sector which has tended to do well in previous market rallies, but the manager is increasingly seeing evidence that the ‘risk-on’ crowd is slowly falling out of love with it.

“News from Rio Tinto highlighted the scale of the value destroyed by the sector’s acquisition spree of recent years. Rio announced a further write down of assets – since acquiring Alcan for $38bn in 2007, the company is estimated to have written down $25bn of the price paid.”

Woodford (pictured) added his 25% holdings in phramaectical names, most notably AstraZeneca and Roche, were also key drivers of performance.

He added other standout performers over the past year which have enjoyed a share price re-rating are Reckitt Benckiser, BAE Systems and BT.

Commenting on the UK market outlook in general, Woodford said he remains in cautious mode after global equity markets strong start to 2013, and is wary of a pullback in share prices.

“The UK stock market’s rise of the past year, fuelled by monetary stimulus and central bank policy initiatives, has occurred despite cuts in forecasts to economic growth and associated reductions in the forecasts of company earnings – most notably in the mining sector but also across the a range of companies most exposed to the economic cycle,” he said.

“Equity valuations on the whole, therefore, are no longer as compellingly cheap as they were a year ago.”


This article was first published on Investment Week

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