Neil Woodford is one of the UK's best-known and most successful fund managers. His two main funds - Invesco Perpetual Income and High Income - are rarely out of the three top-performing funds in their sector over three, five or ten years. The amount of money Mr Woodford is managing in these two funds - more than £14 billion - is greater than most other fund groups are managing in total.

Here Mr Woodford reveals how he keeps ahead of his rivals.

How do you view the current prospects for the UK economy?

“I think we are experiencing the toughest economic environment for two decades. I am convinced that the UK economy is going into recession and the area that will be hardest hit

is the consumer sector. We have had huge growth in consumption, funded by rising levels of debt, but the party is over for this type of debt-fuelled consumption.”

Does that mean that you are pessimistic about UK stocks?

“No, I'm not too downbeat. There are plenty of sectors within the UK stock market that will not be too heavily exposed to the squeeze on consumers.”

Can you name some examples?

“Yes, tobacco, pharmaceuticals and telecoms. I think that the resilience of these sectors has been undervalued.

“Tobacco shares, such as Imperial Tobacco and British American Tobacco, have strong overseas businesses and will be almost untouched by a UK consumer recession.

“Pharmaceuticals stocks, such as GlaxoSmithKline and AstraZeneca, have been marked down heavily and are now trading at a significant discount to the rest of the market. The drugs companies do have their problems, but people will always need medicines - and the barriers to entry for new companies in this sector are high.

“I like the telecoms sector because, even in a recession, people are not going to stop using their mobile phones or computers. Vodafone is trading on a yield of more than 4 per cent, while BT is yielding about 7 per cent, which is quite attractive.”

You pay a lot of attention to dividend yields don't you?

“Yes I do. Over the long term, the vast bulk of returns to investors come from dividends and the reinvestment of those dividends. Dividends are also the acid test of how much confidence a company has in its own money-making ability because they represent a cash payment to shareholders.

“The discipline of buying only stocks that generate a solid dividend is a useful one because it tends to steer you away from frothy, speculative stocks. For example, during the dot-com boom I did not buy technology stocks because they were not paying decent dividends. I came under some pressure at the time for not doing so, but I was vindicated when the tech bubble burst.”

You are also well known for your long-term perspective. How does your approach differ from that of many other fund managers?

“Well, the average length of time that a stock is held in the market is only six months, whereas I hold stocks for an average of more than five years. So while a typical fund manager might turn over his or her portfolio in one or two years, I will take about six years to do the same with mine.

“I think it is very difficult to add value as a manager by making short-term market calls. More often than not you get them wrong. One of the things that I like about being based out in Henley, Oxfordshire, is that you are well away from the rumour mill and short-termism of the City. It helps to maintain a sensible long-term focus.

“On top of this, when you are running funds of the size of the Income and High Income funds [£6 billion and £8.4 billion respectively] it would be both expensive and impractical

to be trying to dip in and out of the market all the time. I drive an oil tanker, not a speedboat. I set up the portfolio as I think it should be and then let it run, making relatively few course changes along the way.”

This sounds like the classic buy-and-hold strategy. Would that be a fair summary of your style of investment?

“Yes and no. I certainly believe in buying stocks for the medium to long term and not tinkering with the portfolio unnecessarily. But while you should not have a hair-trigger approach to selling stocks, nor should you ignore poor performance. This has to be identified and dealt with.”

For your long-term perspective to succeed, you have to spot trends early. You foresaw the credit crunch long before it struck last year. Are you now looking ahead to the recovery phase that will follow the current downturn?

“I think that it is still a bit early in the day to be focusing on any recovery. The current downturn is not merely a cyclical blip - there are structural problems with the UK economy that have to be ironed out, such as our increasing reluctance to save.”

So you are not tempted to start fishing in bombed-out sectors, such as banks and housebuilders?

“I don't think they are a buy quite yet. There is still great value in the defensive sectors I have mentioned earlier. Pharmaceuticals companies have never been on lower valuations, while telecoms shares are looking ridiculously cheap.”

You have been running the Invesco Perpetual Income and High Income funds for nearly 20 years. Are fund managers like fine wines and get better with age?

“Definitely. There is no question that I am a better fund manager now than when I started. Experience is a much underrated quality in fund managers. It helps you to gain a better perspective in whatever situation you find yourself. History may not repeat itself exactly, but patterns emerge and the more experience you have, the greater your chances of understanding those patterns. Look at Warren Buffett, the great US investor. He is one of the best fund managers in the world and he's in his late seventies.”

Would you like to do a Warren Buffett and still be managing money in your seventies?

“Well that's a difficult question to answer because my seventies are still several decades away, but it's not impossible. I have a great team around me and I keep myself very fit. I used to play wing-forward for Maidenhead RFC and I now maintain my fitness levels with the help of a really good personal trainer. I could go on for a long time.”

Career path that paid dividends

Neil Woodford, 48, graduated in Economics and Agricultural Economics from the University of Exeter in 1981 and studied finance later at the London Business School (LBS).

He began his investment career with the Dominion Insurance Company in 1981 as a trainee fund manager. In 1985 he joined TSB, working in corporate finance while studying at the LBS. His next move was to Eagle Star, where he worked as a fund manager.

He joined Perpetual (now Invesco Perpetual) in 1988 and has risen to become the group's head of investment. He currently manages the Invesco Perpetual High Income fund, its Income fund and UK Equity Pension fund. He also looks after the equity element of Invesco Perpetual's Distribution and Monthly Income Plus funds. In addition, he runs funds for a number of other financial groups, including St James's Place.

When he is not managing money Mr Woodford enjoys studying military history, especially the First and Second World Wars. He is also a keen fan of rugby and cycling. He used to play 1st XV at Maidenhead RFC and has completed a number of charity bike rides.

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