While Woodford didn not say how big the stake was, reports suggest that it was initially around 2.2 per cent of the company, or £232m.
"Over the last couple of years, Rolls-Royce has become a more challenged business and this has weighed significantly on its share price," Woodford wrote in a blog post.
Investors had taken this share price weakness as opportunity to beef up their stake in the company, believing that the consequent problems would be relatively short-lived. However, November’s disappointing update led to a loss of confidence in the company, he noted.
Shares in Rolls-Royce tumbled over 20 per cent in intra-day trading in November, after it warned profits would be at the lower end of expectations in 2015 due to "sharply weaker" demand.
The company revealed in July that underlying revenue had fallen three per cent to £6.3bn in the first half of the year, while pre-tax fell 32 per cent to £439m.
"In many ways we hope we are wrong, but we think it is in our investors’ best interests to exercise caution at this point in time. However, we plan to stay in close contact with the company in order that we can monitor progress under the new leadership team which we rate highly," Woodford added.
"If our caution is misplaced, we will look to invest again in the business but for the time being we are happy to stand on the side-lines."