The maximum launch size of the Woodford Patient Capital Trust has been lifted to £800m on the back of strong investor demand, but experts are divided on whether this will affect how well it can play the lower end of the market. 
Woodford Investment Management, which was founded by star fund manager Neil Woodford (pictured) after his departure from Invesco Perpetual last year, announced the launch of the investment trust in February 2015.
The firm has already got off to a strong start with its open-ended CF Woodford Equity Income fund, which has raised more than £5bn and outperformed significantly since launch. This fund focuses on the large-cap equity income stocks that Woodford made his name through.
Performance of fund vs sector and index since launch
Source: FE Analytics
The group was targeting a share capital raising of £200m for Woodford Patient Capital, with scope to lift this to £500m if demand was high enough. However, a supplementary prospectus was unveiled yesterday that allows a maximum amount of £800m to be raised to prevent hopeful investors missing out under a lower limit.
Craig Newman, chief executive of Woodford Investment Management, said: “Over the past few days it has become clear that the concept of investing patient capital in early-stage and early-growth businesses has captured investors’ imagination – so much so that we may exceed £500m during the offer period.”
Of course, it remains to be seen whether the trust will hit its new £800m maximum. If it does, it will be by far the largest investment trust ever at launch by some distance.
Regardless, the management team says if it is closer to the upper end of the scale, it will not affect how the portfolio is managed while it will prevent investors from being disappointed by not receiving shares.“We feel this is in everyone’s interests to do so – the scale of the upsizing is in keeping with the trust’s investment strategy and will not impact its objective or portfolio construction, as outlined in the prospectus at the time the offer was launched,” Newman added.
“Until the offer closes we won’t know whether the trust will raise closer to £500m or £800m. But what we do know is that Neil and his team are very comfortable managing the investment strategy and deploying the eventual initial capital raised in line with the time frame set out at launch.”
Woodford Patient Capital 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.
At launch, the portfolio will be biased towards the blue-chip income stocks usually associated with the star manager but over a period of one to two years more early-stage and early-growth names will be added. It’s envisaged that around a quarter of the trust will be invested in large-cap dividend names, with the rest invested in early stage businesses.
The trust will not levy an annual management charge and will carry a performance fee of 15 per cent of any excess returns over a 10 per cent per annum compound hurdle, subject to a high watermark. The dividends paid out by the larger companies will cover the cost of running the portfolio, which is expected to be around 35 basis point annually. A larger size could result in this figure falling.
While the trust is not a dedicated micro-cap fund, it is expected that it will explore this part of the market given its ability to look across the market-cap spectrum, as well as into unquoted companies, and its focus on innovative businesses.
Funds that focus on this area of the market tend to be smaller, to allow them to take meaningful positions in the companies. Some commentators are confident that the potential increased starting size of the fund will be comfortably handled by Woodford and his team.
Mark Dampier, head of investment research at Hargreaves Lansdown, is cognisant that raising the full £800m would make the trust a major player in the its industry, pointing out that it would be around the 40th biggest investment trust in the UK, a constituent of the FTSE 250 and of a similar size to Fidelity European Values.
“The additional allocation shows the strength of the Woodford brand and the interest in this long-term investment opportunity. It should mean investors will benefit from a better allocation and potentially will receive everything they apply for,” Dampier said.
“An additional £300m doesn’t change the fundamental long-term nature of this investment.”
Martin Bamford, chartered financial planner and managing director at Informed Choice, says he is not too surprised by Woodford’s announcement, given the high level of interest surrounding the trust and constant media attention on the FE Alpha Manager.
“The Neil Woodford hype machine is a strong one and the launch of this trust was perfectly timed, whether by design or luck, with the markets reaching a record high,” he said.
“Excited investors are therefore lining up to part with their cash and invest in areas of the market which they believe still offer long-term growth prospects.”
“Woodford is used to managing substantial portfolios, so I’m sure the fund starting off so much larger won’t result in any unforeseen capacity constraints.”
However, Bamford was more cautious over whether the increased size of the trust would affect its ability to invest in its target businesses: “It will be interesting to see how close to £800m the IPO gets and whether investor expectations of these early-stage and early-growth companies is met by the reality.”
Another commentator with a more cautious view of the increased launch size is Numis. The broker’s note this morning says that if the trust does manage to raise the full amount, it would be the largest London-listed investment trust new issue, as far as it is aware.
“We had expected to see strong demand for the IPO, particularly given that it is being widely promoted through retail investors through platforms such as Hargreaves Lansdown and Fidelity,” Numis’ analysts said.
“Whether or not increasing the size of the fund to £800m will impact on the investment timetable remains to be seen, but it will now be a large pool of capital given the focus on early-stage companies.”
Of course, it is not expected that all of the trust’s early-stage companies will be at the smallest part of the market-cap spectrum. While Woodford is likely to hunt in this part of the market for some of his investments, his intention to supply long-term patient capital to firms means he will hold them as they develop and move up the spectrum.
This means the pipeline will hold some very small companies but many others that are much bigger and still classed as early-growth. Therefore, the normal size limits of a dedicated micro-cap portfolio will not necessarily apply.
Moreover, Woodford Patient Capital’s closed-ended structure means it won’t have to deal with vast inflows post launch.
That said, a larger starting portfolio will almost certainly reduce the trust’s ability to make the most of the very bottom end of the market.
Judith MacKenzie runs the five crown-rated PFS Downing Active Management fund, which is first quartile in the IA UK Smaller Companies sector since she took over in February 2011 with a 79.36 per cent gain.
Performance of fund vs sector over manager tenure
Source: FE Analytics
MacKenzie has mixed feelings about the number of high-profile trust launches that are looking either solely or in part at micro-caps, arguing that this market cannot be successfully played with a portfolio larger than £30m. This would suggest the highest weighting to micro-caps in a £800m portfolio would be just 3.75 per cent.
Alongside Woodford’s trust, other recent launches to look at the space include Philip Rodrigs’ River and Mercantile UK Micro Cap Investment Company and Gervais Williams and Martin Turner’s Miton UK MicroCap Trust.
MacKenzie said: "It's great that finally the small end of the smaller companies market is getting attention from such credible managers. Investors deserve to get access to this asset class which has provided consistent longer term double-digit compound returns.”
“But there has to be a question over how funds under management can be deployed. The universe of companies which fit the profile of these funds is relatively small. To deploy large sums of capital means that managers either have to have a large number of holdings or go up the market cap scale.”
“In our view a large number of holdings is an interesting strategy – these companies can be like unruly children: great one minute but turn your back and they are capable of doing something silly or dangerous.”
“There does seem to be a bit of a feeding frenzy as this sub-asset class gains credibility but investors need to be aware of the constraints and why this is a challenging but rewarding area to invest.”
But it must be noted that although Woodford is usually associated with large-caps, he has a history of investing in firms of all sizes and has more than a decade of experience with unquoted companies.
While some of the trust’s holdings will be micro-caps, it is likely that the long-term gains of the portfolio will come from firms that it has held and grown over years rather than having to rely on this one part of the market for returns. If the manager can build his pipeline of innovative, growing businesses as planned, then the extra size may well present no extra challenges.
Woodford Patient Capital’s issue closes on 17 April and new shares are expected to start trading on 21 April.
