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One of the most successful UK fund managers of the past 15 years has been Neil Woodford of Invesco Perpetual. He runs the Invesco Perpetual Income and High Income Funds. The two funds are almost identical, so although I will refer to the Income Fund in this article, remember that much the same will be true for High Income.

Neil Woodford now manages upwards of 16bn in these two funds, which have been consistently strong performers over the years. Why has he been so successful? To some extent that's like asking why Tiger Woods is so good at golf. Practice and dedication are part of the reason, but the true greats always have a certain intangible edge to their game that is probably beyond definition.

Certainly, part of Neil Woodford's edge is his ability to read economic signals and find shares that fit this outlook and represent truly good value.

For some years he has had a defensive portfolio; in other words, he has been cautious on the UK economy and invested in stocks that should hold up well in a difficult environment. These "defensive" shares have been far from boring. In fact, they have performed extremely well.

Part of the reason for this strong performance is that Mr Woodford tends to buy shares that are unpopular, unloved and unfashionable. This approach allows him to buy shares after many others have sold and the price is cheap; if he makes the right calls there is significant potential for profit as the shares come back into fashion.

One huge success for the portfolio over the past seven years has been the tobacco sector, which was in the doldrums back in 2000 when there were worries over litigation and advertising. However, there has been no successful litigation, and the restriction on advertising simply meant the companies wasted less money on promotions and paid out more in dividends.

Another defensive area is utilities for example, water and electricity companies. These currently account for around 21 per cent of the Invesco Perpetual Income Fund, with stocks such as British Energy and National Grid prominent. Telecoms have also been a success and make up some 10 per cent of the portfolio. While BT has somewhat dragged its feet this year, Vodafone has done exceptionally well. Mr Woodford feels there is plenty more growth potential for these two companies.

The pharmaceutical companies are also presenting him with opportunities: note that this is currently a deeply unfashionable area with the market. Neil Woodford believes companies such as AstraZeneca and GlaxoSmithKline are at highly attractive valuations.

He admits they face stiff challenges, but this is already reflected in the price. Furthermore, he believes the market has completely misread the quality of the drugs pipeline and the fantastic distribution infrastructure that these companies possess.

Neil Woodford is currently avoiding areas that are highly exposed to consumer spending and the housing market. He feels it is too early to say how badly these areas will be affected by an economic slowdown. It is a similar story for UK banks, where he has had no exposure for quite some time. The present credit problems are likely to persist into next year and there is no need to take the risk of buying these shares now when he has plenty of ideas in other areas.

It might sound like I am painting a picture of total gloom, but that isn't true. Although a recession next year is a real possibility, Neil Woodford's defensive portfolio has more chance than most of making money. It is also worth noting that he expects good dividend growth (approximately 10 per cent) next year on top of the 3.3 per cent current yield. Dividend growth is an often overlooked part of investment, but it can have a huge effect on returns over the long term.

In conclusion, although the forecast for 2008 is currently a little cloudy, you shouldn't go running for cover. I recommend that you maintain your expo-sure to the UK market and remember the importance of investing with the best fund managers.

If you believe in paying for the best doctor if you are ill, or best builder when you want something done in the house, then you should carry this through to your investments. And without doubt, Neil Woodford is one of the best managers you will ever find.



Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

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