Neil Woodford’s £800m Patient Capital Trust has been trading for a month but you could forgive the star manager for not deploying all of its shareholders’ cash quite yet – considering it is focused on early-stage firms with small market capitalisation relative to the broader market as well as being the biggest trust launch in UK history.
However, Woodford has been busy participating in the underwhelming initial public offering (IPO) of one such firm as well as adding to another micro-cap which has recently taken a battering in his open-ended £5.5bn CF Woodford Equity Income fund, FE Trustnet recently heard the manager say.
Speaking at the Value Investor Conference this week, FE Alpha Manager Woodford pointed out that stocks will go through periods of underperformance and said it pays to hold conviction, hence his decision to ignore the recent underperformance of these two firms.
The manager believes his new investment trust has filled a gap in the market for the longer-term backing of early-stage companies. Many of these are still in development without any regular cash flow into the businesses but show a very real prospect of stellar growth given appropriate access to capital markets.
Woodford recently participated in the IPO of Verseon, a US-based biotechnology company. The stock has had a slightly disappointing two weeks since it floated on the AIM and has been mostly losing value, albeit marginally.
Performance of stock since 7 May 2015
Source: FE Analytics
“Verseon is a good example of some of the early technology companies we have been backing. It is early in its life – relatively – but what we are trying to do is to invest in and nurture technologies at a relatively early age that we think will succeed and become very disruptive,” Woodford said.
“We believe Verseon fits the criteria that we have put in place to screen for, along with a really small handful of other companies that meet that criteria on a scale that we think is significantly disruptive.”
“How can we make that judgement? Because we have some experience, because we do a lot of due diligence, but ultimately we are backing a relatively early technology and our judgement is informed by what has happened in that business.”
Verseon uses computer algorithms to assist drug development and is based in San Francisco. It hopes that by creating ‘digital molecules’ it can circumvent the long and expensive process of bringing commercial drugs to market.
“The business and technology has been running for 10 years so the company has already been through a number of stages where it has ironed out the technology and overcome a lot of the hurdles,” Woodford explained.
“We think that Verseon is a lot further through the technology risk period than many would think and that is the reason for my committing a significant allocation to it.”
“The commercialisation hurdles are still ahead for the business but we don’t think they are anything like as challenging as the technology hurdles that the business has already overcome. We are very excited about this business.”
Woodford is well-known for favouring pharmaceuticals and tobacco firms but less known backing utility names.
However, the manager has also been adding to a holding in Utilitywise, which helps companies get the most value from their energy and water contracts and reduce their energy and water consumption.
The manager is a major shareholder in the company, which after floating three years had a strong run in its share price that saw initial investors make close to 500 per cent returns.
However, it has been plunging in value for the past year over which time it has lost about a third of its value.
Performance of stock since July 2012
Source: FE Analytics
Woodford says there has been a few research notes written about alleged bad accounting procedures by the firm that were likened to the 2014’s most besieged AIM stock Quindell.
However, Woodford said that his own firm’s research had found no irregularities in Utilitywise’s practices.
“We have done extensive due diligence on Utilitywise and we actually had an extremely good meeting with the company last week and we are completely satisfied that their accounting is entirely appropriate about what happens within the business.”
“We are very comfortable with the accounting, the cash flow and the future outlook for the company. So we are extremely relaxed. The valuation is ludicrous. It has been unfairly hit. I don’t think it was malicious in any way but it is inaccurate analysis frankly. We are very confident in the business and have used the weakness that we have seen recently to buy more shares.”