Why Neil Woodford can still beat the FTSE 100 despite an 'annus horribillis'

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The FTSE 100 has enjoyed a prosperous year. It has risen in value by around 8%. When dividends are added, that brings its total to return to in excess of 11%. A mix of improving investor confidence, a weak pound and loose monetary policy across the developed world have combined to create favourable operating conditions for a number of the index's constituents.

During the same time though, Neil Woodford's Equity Income fund has fallen in value by over 1%. This is an underperformance of the wider index of 12% and an underperformance of the UK Equity Income benchmark of over 10%. This puts Woodford's fund in the bottom quartile versus its peers, and has caused some investors to doubt whether he can turn his poor performance around.

A difficult year

Clearly, Woodford has made some poor short-term decisions which have led to losses in the last year. A couple of notable examples include Provident Financial and Capita. Both companies have released profit warnings in the last year which have pushed their share prices lower by 73% and 40% respectively. Even today, they are among the largest holdings in the fund and they have therefore had a negative impact on fund performance.

Woodford has also been criticised by some investors for selling stable, defensive income stocks such as GlaxoSmithKline and British American Tobacco in the last year. They have been among the fund manager's preferred stocks for a number of years, and for many investors they offer the perfect mix of defensive characteristics and growth potential. They have been sold in favour of companies such as Lloyds, which faces a less certain future due to the potential impact of Brexit.

Long-term potential

Despite his underperformance of the index in the last year, Neil Woodford remains one of the UK's top investors. However, the last year does prove he is a mere mortal and is capable of making short-term errors just like any investor. That's because timing the stock market is an incredibly challenging pursuit to undertake, and it can mean paper losses in the short term.

In the long term though, the fund manager continues to have an excellent track record of delivering consistent total returns for his investors. And since he focuses on a multi-year time scale rather than a one-year period, it is far too soon to consider whether he has 'lost his touch'.

Therefore, he still has scope to beat the FTSE 100 in future years - especially since his natural tilt towards defensive income stocks could prove beneficial should inflation move higher and geopolitical risks involving North Korea increase. As such, backing Neil Woodford still seems to be a sound move for long-term investors - even if the last year has been an exceptionally tough one for him.

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Peter Stephens owns shares in Lloyds, GlaxoSmithKline, Capita and British American Tobacco. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.