Woodford Investment Management plans to raise £200m through the launch of the Woodford Patient Capital Trust – a diversified portfolio of mainly UK companies, both quoted and unquoted, aiming for an annual return of 10 per cent over the long term.
The firm’s first fund – CF Woodford Equity Income – has had a strong start since its launch in June last year, as the graph below shows.
Performance of fund vs sector and index since launch
Source: FE Analytics
The trust will reflect Woodford’s belief that fledgling businesses from all sectors face a lack of capital and most investment they do receive tends to be short term in nature. The trust aims to capitalise on these “significant untapped opportunities” through Woodford’s experience in investing in early-stage companies.
Woodford (pictured) said: “The UK has an excellent track record in innovation, but has been poor at converting that into commercial success. Politicians talk about the need to rebalance away from banks and property and into productive industries, but have been very poor in implementing that. There's a lot of reasons for that, but the biggest reason is the lack of long-term patient capital. It's my belief that commercial success relies on this.”
“I've wanted to do this for a very long time. I passionately believe in the principles that surround what I'm doing here. I've been investing in early stage businesses for the best part of 20 years and unquoted for at least 10. It remains an amazing unmined opportunity. It's a good opportunity for investors but also a good chance to do some good for early-stage businesses."
The FE Alpha Manager says valuations in early stage businesses and especially unquoted companies are very attractive, making the opportunity particularly exciting for investors wary of elevated prices elsewhere.
"There's an unbelievable opportunity for investors to make great returns. The reason? There is a huge demand for these companies but the supply just isn't there. Valuations are on the floor."
News of Woodford Patient Capital Trust has been well-received by the investment community. Investing at the smaller end of the market has been a strategy of Woodford’s for some time and his CF Woodford Equity Income fund has added several fledgling companies to its portfolio.
Ben Willis, head of research at Whitechurch Securities, said: “He has got a passion for that area of the market and he has proven that he can identify the right companies to back and provide capital for. We are definitely interested as it will be a more aggressive geared play on his open-ended fund and the way in which he will run it is suited to an investment trust’s closed-ended structure.”
Mark Dampier (pictured), head of research at Hargreaves Lansdown, added: “Neil Woodford has an impressive track record of supporting new fledgling companies, and nurturing them to success with his long-term investment approach. He already holds some within the CF Woodford Equity Income fund and this new investment trust will allow him greater freedom to uncover the great companies of tomorrow.”
Woodford Investment Management stresses that the portfolio will very much be a work-in-progress. At launch, it is expected to dominated by listed mid and large-cap mature business that offer growth opportunities before lifting exposure to early-stage and early-growth companies as opportunities arise.
This means the trust is likely to look like CF Woodford Equity Income for the first few months of its life. However, the manager says there are plenty of opportunities in the space – for example, his open-ended fund already holds 15 unquoted companies with another 12 in the pipeline.
Given Woodford’s longstanding interest in the area, the trust is likely to have significant exposure to medical science but will also look to other niche areas such as disruptive financials, rural fibre networks and disruptive estate agents.
While the growth potential in this area of the market is immense, some commentators have reminded potential investors that it is not without risk, regardless of the pedigree of the manager.
Martin Bamford (pictured), managing director at Informed Choice, said: “News of the intention to launch the Woodford Patient Capital Trust has been greeted with great excitement by those who worship at the church of Neil Woodford.”
“A lot of the focus seems to have been on the ‘attractive target returns’ set at 10 per cent per annum, but little has been said about the risk required to obtain these returns in the current economic environment. Investing in early-stage and early-growth companies is inherently risky, even when part of a portfolio which is blended with blue-chips.”
“In a market where interest rates are at 0.5 per cent and inflation is the same, targeting annual returns of 10 per cent means exposing your capital to the great deal of volatility and the risk of capital loss. Whilst Woodford has delivered some outstanding performance in the past, he is not a magician and the same rules of risk and reward apply to him as any other investor.”
Woodford, however, argues that the kind of companies he will be targeting can be less volatile than might be expected. While there is always the risk a business could fail, he will be putting his money in alongside other patient investors who will be unlikely to pull their cash at the first sign of a problem.
Fully building the trust’s portfolio could take one or two years from launch. The portfolio is expected to eventually be split 75 per cent in early-growth stocks and 25 per cent in the larger dividend-paying names associated with the star manager, the income from which will pay the trust’s costs.
"I wouldn't expect to deliver 10 per cent in year one but over the long-term I expect attractive returns," Woodford added.
The trust will not charge investors an annual management fee, with the manager instead being remunerated through a performance fee. This will be payable in ordinary shares, aligning interests with the underlying shareholders.
However, details of the fee structure – such as what performance will be benchmarked against – have yet to be confirmed. Willis said: “While the fee structure sounds good, we would like to see exactly how the performance fee will be calculated.”
Bamford added: “It is great to see some innovation from this fund, with a zero management fee and performance fees based on what will hopefully be a very high hurdle rate. We hope this performance fee will be capped at a sensible level so investors in the fund do not pay over the odds for exposing their capital to risk.”
Thomas McMahon, fund analyst at FE Research, also points out that early-stage investments have the potential for higher drawdowns as well as strong returns and warns that the trust could move to a premium very quickly.
“[Early-stage investing] isn’t a problem if you understand the risks and making a small allocation within a broader portfolio. However, I would expect this fund to shoot onto a premium, meaning that investors will have to pay more than the value of the underlying assets to invest,” McMahon said.
“This has happened to a number of recent launches by big name managers and in this area of the market – R&M Micro Cap and Fundsmith Emerging Equity, for example. If Woodford wants to keep this premium down he will have to issue equity, which will grow assets and reduce the size advantage the fund has.”
“The problem for an investor with buying assets on a premium is that your losses in a sell-off are likely to be compounded.”
Peter Walls, manager of the Unicorn Mastertrust fund, on the other hand, argues that investors who manage to get into the trust at launch could profit from this move to a premium. He has been paying more attention to trusts’ IPO than he used to, given the increasingly quality of offerings coming to market.
“I think you have to think more seriously about IPOs now because discounts aren’t as big a problem as they used to be. I don’t know if anyone has done any analysis on it, but I’d imagine that most IPOs over the last couple of years are now trading on premiums,” he said.
“In the past I used to take a more wait-and-see approach to them, but I take a fair bit more interest now. For instance, I bought the Fundsmith Emerging Market Investment Trust and sold it on an 11 per cent premium.”
“I think you are only going to see quality names in the IPO market now because you’ve got to go and raise £150m or £200m on day one and if it is a bit of a flaky story, you are not going to get there. It’s anyone’s guess [whether Woodford Patient Capital comes to market on a wide premium] but my guess would be that it will be on a bit of a premium as his name goes before him, rightly or wrongly. ”
But Dampier says that most investors should not be buying the trust to make a quick profit and should bear in mind that Woodford plans to run the portfolio with the long term firmly in mind.
He added: “Those investors who wish to invest in this fund should similarly take a long-term view, by which I mean at least 10 years, and should make sure they study the prospectus carefully before investing.”
Woodford Patient Capital Trust’s prospectus will be published later this month, with admission to the market and dealings in ordinary shares expected commence in mid-April.
