The commodity rally in 2016 was one of the main factors behind "a disappointing year from a performance point of view" for the CF Woodford Equity Income fund, manager Neil Woodford admits.
However, the star fund manager says that while the share prices of the companies he is invested in "did not perform terribly well", he is sticking to his guns.
Mr Woodford said he has seen "considerable fundamental progress made across much of the portfolio' over the past year, but argues "this has not been reflected in share prices".
CF Woodford Equity Income returned a mere 3.2% over the course of the year, compared to an 8.8% gain for the Investment Association's UK equity income sector average. Worse still, the fund was a fair distance behind the FTSE All Share index, which returned 16.8% in 2016.
One reason for this was the lack of oil & gas or mining companies in Mr Woodford's portfolio. Commodity stocks enjoyed a strong 2016, thanks to a rebound in the oil price. This heavily influenced the performance of the FTSE All Share.
As the chart below shows (click to enlarge), when stripping out the big six resource firms and banking giant HSBC, the FTSE All Share's return more than halves to 8.2%.
Lack of exposure to the oil and mining stocks, however, was not the only reason the fund underperformed both peers and the index. Some of Mr Woodford's stock bets turned sour.
The portfolio has a combined 3.5% of its portfolio invested in Capita and Next, two of the FTSE 100's three worst-performing shares in 2016. The pair saw their share prices decline by 60.5 and 33.2%, respectively.
The healthcare sector, which Woodford has more than a third of his portfolio invested in, also struggled last year - leading, he says, to many asking why he continues to be overweight the sector.
"We see a lot of value being stored up in the sector and there are some promising drugs coming through from the pipelines of both small biotech and large pharma companies.
"Going forward, as a result of the market's failure to acknowledge this progress over the last 18 months, it is plausible that value starts to be recognised in the form of more M&A activity in 2017.
"Consequently, we believe that there is considerable long-term value within the healthcare sector and we have positioned the portfolio to capture this opportunity."
Confident of delivering long term
And while Mr Woodford concedes the share prices of companies he is invested in "have not performed as well as I would have hoped", he holds the view that in 2016 "broadly the portfolio has delivered really well in terms of fundamental performance relative to our expectations".
"And whilst we continue to see that evidence accumulate, that the businesses we're investing in are continuing to deliver the things that we wanted them to deliver, share prices will always catch up with reality at some stage," he adds.
For this reason, he continues to keep the faith in the likes of Capita, of which he says "the share price now profoundly undervalues the fundamental long-term attractions of this business".
Looking forward, Mr Woodford, writing on his blog, compares the current momentum-driven stock market performance to the technology bubble during the late 1990s.
This is always a really testing time for active fund managers, he says, while adding that such times throw up plenty of opportunities to create long-term value.
"When markets become momentum-driven, that's the time when you need to have your investment anchors securely in place," he explains. "My investment anchor is driven very much by valuation and a long-term perspective on valuation.
"As share prices have become more detached from fundamentals, that has made me more confident about what we can deliver in the long term - but it's tested my resolve, certainly through 2016."
This story was originally written for our sister magazine, Money Observer.