LONDON -- As any experienced investor will tell you, beating the stock market is easier said than done.
By taking on more risk, you can beat Mr. Market for a few years but then put in a terrible performance that wipes out most of your hard-won returns. For example, many investors ran up huge losses in 2008, a year when the FTSE 100 (INDEX: ^FTSE) crashed by more than 31%.
Hence, fund managers who consistently beat the market over a decade or two are as rare as hen's teeth, as almost all professional money managers hit the canvas eventually. I say almost all because there is one particular candidate who stands out as perhaps the best of thousands of money managers in the U.K. today.
It's not rocket science
This investing legend is, of course, Neil Woodford, the much-praised manager of two of the U.K.'s largest retail funds: Invesco Perpetual High Income and Invesco Perpetual Income. In these two funds alone, investors have entrusted Woodford with more than 20 billion pounds of their hard-earned cash. Woodford has run both funds for two decades now and has managed the Edinburgh Investment Trust (ISE: EDIN.L) since September 2008.
So what's his secret?
Woodford's special skill is remarkably simple: He has extraordinary patience and sticks to his knitting, buying bargain shares when others panic during the latest market meltdown. Hence, Woodford's commitment to investing in solid, well-run companies with predictable earnings and generous dividends has served him brilliantly since he joined Perpetual in 1988.
Before joining Perpetual, Woodford graduated with a bachelor's degree in economics and agricultural economics from the University of Exeter in 1981, and his career took him through Dominion Insurance, TSB, and Eagle Star. Born in 1960, Woodford is also one of the youngest "all stars" in our Investment Greats series.
In 2000, when Perpetual was bought out by Amvescap (now Invesco), Woodford reportedly made 50 million on the deal, in addition to retention bonuses.
To show you how just how thoroughly Woodford has flogged the market for years, take a look at the following table, which shows his investing returns over the five, 10, and 15 years prior to Dec. 31, 2011, versus the FTSE All-Share (INDEX: ^FTAS) index:
High Income Fund
Source: Bloomberg. Figures include reinvested dividends.
As you can see, Woodford has absolutely thrashed the wider market over all three periods.
Over the past 15 years -- not a terribly favorable period for shares as a whole -- Woodford's two funds have produced returns of 347% and 335%. In other words, his happy investors beat the wider market by 305% and 293%, respectively.
That's the kind of outperformance that creates loyal, lifelong customers!
The comeback king
What's equally remarkable is the consistency with which Woodford has beaten his peers. Incredibly, he beat the market for nine years in a row, as both of his funds beat the FTSE All-Share every year from 2000 to 2008.
However, in the huge market rebound of 2009 and 2010, Woodford's conservative, dividend-orientated funds didn't bounce back as strongly as the wider market did. While the FTSE All-Share leapt by 30% in 2009 and 15% in 2010, Woodford's funds climbed by 10% to 11% a year.
Although his focus on value over growth may have held back his funds in those two years, Woodford's quality soon shone through. Indeed, his funds have since gone on to outdo the market during the turbulence of 2011 and early 2012. During 2011, for instance, Woodford made 12% for his investors, while the FTSE All-Share dipped by 3%.
In fact, Woodford doubly deserves this reputation as the "comeback king," as his funds rarely underperform for long periods.
For example, his funds fell out of favor during the go-go years of the late 90s as the "hot money" poured into racy dot-com funds. When growth funds ran up huge losses and left investors with burnt fingers, Woodford's funds slowly but surely showed their class by protecting and growing investors' capital over the next decade.
Show me the money
To recap, Woodford likes to invest our money in large, well-established businesses that generate plenty of cash and are committed to returning some of this to shareholders via decent dividends. All he aims to do is to capture as big a share of this future dividend stream as he can for investors in his funds.
By sticking with income investing and not following the latest investment fad, Woodford has produced superior, consistent, long-term returns that other fund managers can only dream of. Also, by focusing on quality, defensive businesses, Woodford has avoided the high-risk end of the market, where the biggest losers lurk. For example, he ditched financial shares long before the credit crunch of summer 2007 blew up our banks and led to huge, taxpayer-backed bailouts.
When he's wrong, Woodford isn't afraid to admit his mistakes, sell shares, and move on. For example, he sold a large holding in supermarket leader Tesco (OTC: TSCDY) (ISE: TSCO.L) after its first profit warning in 20 years.
Finally, Woodford has beaten the wider market by ploughing his own furrow and playing the long game. But which blue-chip companies is he keen on right now? To find out this and more, download our special report, "8 Shares Held By Britain's Super Investor." It will give you yet more insight into the mind and methods of Britain's home-grown version of Berkshire Hathaway (NYS: BRK.B) legend Warren Buffett!
Are you looking to profit as a long-term investor? "Ten Steps To Making A Million In The Market" is the latest Motley Fool guide to help you invest. Better. We urge you to read the report today, while it's still free and available.
More investing greats:
At the time thisarticle was published Cliff does not own any of the shares or funds mentioned in this article. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Tesco and Berkshire Hathaway. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.