In his latest update to investors, the manager of the five crown-rated Invesco Perpetual High Income fund said he is unfazed by the recent surge in markets, and has no plans to raise his risk-exposure.
"At a time when the UK stock market appears more relaxed about the risks facing the world economy and financial markets, we have become a bit more cautious," Woodford (pictured) explained.
"The environment is still very challenging in a real sense, but financial markets have been propped up by symptomatic treatment rather than by a cure of the world’s economic problems."
"The gap between reality and perception has therefore widened," he added.
The £12.1bn High Income portfolio has significantly underperformed the market in the last year, following a big surge in the FTSE All Share.
It has also heavily underperformed its peers in the UK Equity Income sector, many of which have upped their exposure to cyclicals in anticipation of a UK recovery.
Performance of fund vs sector and index over 1-yr
Source: FE Analytics
According to FE Analytics, only 10 funds in the UK Equity Income sector have returned less than Invesco Perpetual High Income in the last year. It is up 9.55 per cent in the period, falling short of its sector average by 6 percentage points.
The fund is still marginally ahead of its sector and benchmark over three and five years, but only just: it has returned 18.56 per cent since January 2008, compared with 18.44 per cent from the All Share.
Sectors such as tobacco have produced a big drag on performance recently, but Woodford says he is sticking to his guns.
Talking about performance during the month of December, he said: "In an environment where the stock market has favoured a 'risk-on' strategy, the defensive positioning of the fund has led to it underperforming the rise of the market."
"The tobacco sector, in which the fund is heavily overweight, endured a challenging month, with the fund’s holdings all delivering negative returns."
"We retain our view that the current valuations do not fully reflect the quality, dependable characteristics that the likes of British American Tobacco, Imperial Tobacco and Reynolds American can bring to a portfolio."
According to FE data, Invesco Perpetual High Income holds all three of these companies in its top-10.
Even though Woodford is concerned by the number of headwinds facing markets, he says he is confident the fund can deliver decent returns, and points to a number of stock-specific examples that have recently experienced positive news.
He commented: "While we worry about the environment, we have very strong levels of conviction in the attractiveness of the businesses in which the fund is invested, and in their ability to deliver consistent returns over the medium/long-term, regardless of the economic headwinds we believe we are likely to face."
"[In December], BAE Systems confirmed a £2.5bn deal to supply Typhoon and Hawk aircraft to Oman."
"G4S, which has endured a tough 2012 on the PR front, was confirmed as a potential supplier to the Department for Work and Pensions, and Centrica welcomed the news that the life of two UK power stations, in which it has a 20 per cent stake, has been extended by seven years."
Invesco Perpetual High Income requires a minimum investment of £500 and has a total expense ratio (TER) of 1.69 per cent. It has five FE Crowns.
Woodford heads up seven open- and closed-ended funds in total, including the £9.2bn Invesco Perpetual Income and £2bn Invesco Perpetual Distribution funds, as well as the Edinburgh Investment Trust.