Woodford Patient Capital is an investment trust specialising in innovative growth companies, aiming to produce long-term capital growth in excess of 10 per cent per annum. Managed by Neil Woodford, one of the UK’s most renowned fund managers, it attracted a plenty of interest at launch in April 2015.
Mr Woodford is better known for running income-orientated funds focused on established, larger companies paying healthy dividends. However, he has always taken a keen interest in companies in the early stage of their development. This Trust is dedicated to providing capital to businesses he believes will be big winners in the future.
Following an initial surge on the back of investor excitement, the Trust has got off to a rocky start. Shares have fallen from the launch price of £1 to around 74p presently, a 12 per cent discount* below the estimated net asset per share of 83p. Heavy share price falls for some of the trust's major holdings such as Northwest Biotherapeutics and Allied Minds have weighed, and more recently a disappointing clinical trial result from top holding Prothena contributed to the poor run. The latter position represented 9.1 per cent of the net assets of as at 31 March, so the collapse in value of the shares was a considerable blow.
Now, owing to the Trust’s falling value, it has fallen out of the FTSE 250, the second tier of the UK stock market’s largest companies behind the FTSE 100. The reshuffle was calculated using closing prices on 29 May, and will come into effect on 18 June.
What is the outlook now?
Although returns have been disappointing thus far, it remains early days for the strategy, which is seeking to exploit very long-term investment opportunities. Set backs are symptomatic of early-stage investing and across a portfolio a small number of winners can, in the fullness of time, offset these and mean strong returns overall.
The manager insists his rationale for launching the Trust remains very much intact: namely that capital available to nascent businesses in the UK has been scarce or too short term. By taking a patient approach and backing businesses for the truly long term, Mr Woodford believes the immature and innovative firms he selects have huge untapped potential, and that backing them will ultimately prove highly rewarding to investors. He states, “We are building some great businesses, although this progress has not yet flowed through in terms of share price and NAV performance”.
There have been some significant winners since launch that illustrate the potential when things go well. Purplebricks, the online estate agent whose share price has quadrupled since listing on AIM in December 2015, and now has a market cap of nearly £1bn. Several of the life sciences holdings have performed well too, including Immunocore.
Although better known for backing large, reliable and already-profitable businesses in his equity income funds, Mr Woodford has long devoted a small portion of his portfolios to much smaller, high-growth businesses. We believe the venture capital approach adopted within this Trust is an interesting way to access innovative earlier-stage businesses, but these investments mean a very high level of risk and results will often take time. In particular, there is significant exposure to early-stage biotechnology companies where in some cases the investment thesis rests on the success of one or a small number of drugs or therapies.
Nonetheless, it is a differentiated investment with an attractive fee structure (there is no base fee and the performance fee is 15 per cent of NAV returns above 10 per cent per annum), and the closed-ended nature of an investment trust is appropriate for early stage investments, which are usually more difficult to buy and sell.
In terms of the current opportunity, shares trade at a significant discount to net asset value – 12 per cent at present. This is due to depressed investor sentiment, possibly exacerbated by the impending FTSE 250 demotion. Some FTSE tracker funds owning the Trust will be forced to sell when it is no longer a constituent of the index, though many such index funds tend to exclude investment trusts. It could prove a good entry point for those that believe Mr Woodford’s assertion that he Trust has stakes in several companies that could be worth billions of dollars each in the future.
* Prices of investment trusts are dictated by supply and demand rather than directly from a calculation of the underlying value of the portfolio. Over time, prices broadly track movements in the value of the portfolio, but shares can trade at a “premium” or a “discount” to this, which is heavily influenced by investor sentiment. There is a useful article from The Association of Investment Companies (AIC) on how this works here.
This article is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investors should be aware that past performance is not a reliable indicator of future results and that the price of shares and other investments, and the income derived from them, may fall as well as rise and the amount realised may be less than the original sum invested. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.