Neil Woodford, manager of Invesco Perpetual High Income, was in animated mood when I met up with him last week. It was good to see how passionate he still is about managing money and how strongly he feels about the present economic position. Some commentators call him "Mr Gloom" due to his often cautious view on the economy, though this is rather a simplification of his thoughts.
First and foremost he is extremely bullish on the prospects for his own portfolio. More on that later. In addition, he continues to believe the legacy of the financial crisis will be around for many years to come.
He suggests too many fund managers are seeing the world through a "conventional lens", believing the usual economic rules apply. This has led them to favour more economically-sensitive stocks believing recovery is around the corner.
Mr Woodford believes they are failing to understand the bigger picture of the ongoing banking crisis. He maintains the environment has permanently changed, and while policymakers are responding, they have a limited range of tools.
He sees no magic wand to make the West's debt problems go away and doesn't expect a new stock market bull run – at least not one built on solid foundations.
The European Central Bank's Long Term Refinancing Operation (LTRO) is, in his view "the starting gun for deleveraging".
Mr Woodford believes the prime creditors, the banks, remain in trouble, and there is even the possibility of nationalisation in some cases. He suspects they will have to do much more in due course, selling good loans while reducing lending and short-term finance to companies. In other words, bad debts have to be written off eventually and credit contraction is the inevitable result.
He also points out that around half of UK mortgages are interest only (i.e. where no capital is being regularly repaid), so it is worth asking how and when are banks such as Lloyds going to get their principal back? With a mortgage book of £360bn, Mr Woodford finds it troubling.
For these reasons you will find no banks in his fund, and his portfolio is very much shaped by his outlook. He wants to own companies that are well managed, have strong balance sheets, resilient business models and generate plenty of cash. His focus, therefore, is on dividends and dividend growth, and he believes companies with these characteristics can be found at attractive prices.
Activity in terms of buying and selling has been kept to a minimum recently. He sold Tesco when the recent profit warning came out and was able to dispose of the holding quickly. There was a large buyer in the market in the form of Warren Buffett, the US investment guru. Mr Woodford thinks Tesco simply has too many plates spinning and its competition has improved, making restructuring a more difficult task.
In contrast, he speaks enthusiastically about companies such as Drax, which he thinks will be one of the best renewable plays on the UK market. His well-known stance on pharmaceuticals remains, with large weightings in GlaxoSmithKline and AstraZeneca, as well as overseas such as Roche and Novartis. His total pharmaceutical sector exposure is 30 per cent.
He also likes certain manufacturing companies such as Rolls-Royce, which he believes is considerably undervalued and easily the best company in civil aerospace. He says much the same about BAE, a business with excellent visibility of earnings. He thinks the proposed defence cuts are not ones that would harm BAE or Rolls-Royce drastically, and their service books alone should give them plenty of recurring income.
While Mr Woodford remains of the view that there is an arduous grind to come in the West, and in the UK particularly, he believes his portfolio will add plenty of value for investors. With a yield of around 4 per cent, plus plenty of potential dividend growth, I believe this is one of the very best defensive plays available on the UK market. There will probably be periods of underperformance in short-term market rallies, but I believe this fund will see you through the difficult times over the long term.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent