Tuesday 22 October 2019 6:57 am

Is the Woodford Patient Capital trust a good buy opportunity?

Following months of turmoil for investors, it took just days for Neil Woodford’s investment business to come crashing down. 

News that Woodford’s £3.1bn flagship Equity Income fund was to be wound up marked the beginning of the end, and sent the share price of another of his offerings, the Patient Capital trust, spiralling to 32.5p. Yesterday, it sank to a fresh low of 32.2p.

While it has been confirmed that Woodford’s Equity Income fund is to be liquidated (and the administrator is deciding whether to do the same for the now-suspended £300m Income Focus fund), uncertainty hangs over the future of the investment trust. 

The board is currently looking for a manager to replace Woodford, but some suspect that the trust may end up suffering the same fate, by being wound up with money returned to shareholders.

Despite Woodford being sacked as manager, the trust is still currently trading – and at a mammoth 50 per cent discount to the net asset value (NAV). So the question now is: does the trust look like a cheap buying opportunity, or should you steer clear?

It’s a tough call for investors. “The fund has always been a wild card option, but after even more torrid times, many may be viewing it as an even more speculative play,” says Moira O’Neill, head of personal finance at Interactive Investor. She says that around 55 per cent of trades in the trust between 14 and 16 October came from sells, rising to 60 per cent on Thursday 17 October. 

“The market will be watching with interest to see which manager is appointed to take the trust forward, and that could make all the difference. But there have been so many twists in this tale, it is no surprise to see customers divided.”

While we wait for clarity on who will be taking on the management of the trust and what the strategy will be, admittedly a lot hangs in the balance. But some argue that this could be a good time to buy shares.

Wealth manager Philip Milton thinks that the downside risk is limited. “Being logical, if something is £1 and it drops to 32p, it was high risk. If it is now 32p, it is probably low risk. Most of the worst (if not all) has already happened, so it cannot happen again.”

Milton argues that the risk-reward for an investor today is still compelling, even if the company went into phased liquidation. 

Another positive is that the concerns about illiquid assets – which plagued the Equity Income fund for months – are less worrying for the trust, because the structure is better suited to these hard-to-sell investments. 

However, the overlap of assets between Woodford’s three funds could have a knock-on impact – particularly if, say, limited competition for some of the biotech stocks allows buyers to demand a bargain price, meaning that the trust’s investments could also suffer. 

As Milton warns: “If an innovative research company is close to a breakthrough, but it fails to raise capital for the last mile, the whole investment can go bad.” Indeed, there is still scope for Woodford’s previous decisions to indirectly inflict pain on the trust.

So all eyes therefore turn to what the board chooses to do.

Ewan Lovett-Turner, research analyst at Numis, says the board is in a better place to assess its options than previously, pointing out that it has recently been strengthened with the addition of directors who have plenty of experience around investment trusts.

Given the high allocation to early-stage unlisted stocks, the success of the trust going forward will depend on whether a new manager has experience of private equity.

Lovett-Turner warns that any change of manager would be likely to involve a change in fee structure in order to align management to any revised objectives. “Typically a fund trading on a 50 per cent discount to NAV would present a clear buying opportunity. However, we remain cautious until there is greater clarity on the nature and valuation of the portfolio.”

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