Investors in the Woodford Patient Capital investment trust should consider selling their holdings, according to Oriel Securities’ Iain Scouller, who says its rapid move to a double-digit premium makes it worth cashing in despite its listing on the stock market just a matter of months ago.
The trust launched in April to much fanfare, not least because of the £800m it received from investors – four times more than its initial £200m target. It has seen its premium shoot up to 13 per cent while its net asset value (NAV) has risen by 4.3 per cent since launch, Scouller notes.
Performance of trust, sector and index since launch
Source: FE Analytics
“Given the long-term ‘patient’ investment style, we think the shares have risen too far, too soon partly for technical index-joining reasons,” he said.
“Over the past three weeks, the share price of Woodford Patient Capital has risen from 105p to 116p, with this 11p gain being well ahead of the 2p gain in the NAV over the same period. We think a key reason for this premium expansion is the inclusion of the shares in the FTSE All Share and FTSE 250 indices.”
“With the fund having only been launched two months ago, these are extremely early days in the life of the portfolio. Indeed, there have not yet been any factsheets or RNS announcements from the new fund on the level of invested assets or composition and shape of the portfolio.”
“Normally, in these circumstances, we would wait some time before initiating coverage. However, given the elevated premium and the technical index factor, which appears to have created demand for the shares, we think it is worth highlighting the expensive nature of the shares to investors at this early stage.”
The Woodford Patient Capital Trust was included into the UK two indices in their latest rebalancing last Friday, which Scouller says is very likely to have generated significant demand for the shares from index tracker funds this week.
BlackRock, the titan fund management group, has been the trust’s biggest backer since it was launched and have responded in recent days to up its share to more than 13.4 per cent.
Simon Elliott, head of research at Winterflood Securities – which is a broker for the trust – notes that extended premiums and discounts in trusts can often be seen at the time of index changes.
"Clearly, if you are a fund that is going to be relegated from the FTSE All Share you would expect to see the discount widen out and if you are about to be promoted then you expect the discount tighten or the premium extended. That is exactly what we have seen this time around,” he said.
“Most people are taking a three-year view on this stock, not a three-month view. Woodford Patient Capital has got to be seen in that context.”
Star fund manager Neil Woodford (pictured) manages the trust via his firm Woodford Investment Management, the company he founded after his departure from Invesco Perpetual last year, where he had worked for more than 25 years.
He announced the launch of the investment trust in February 2015 and has also just passed the first birthday of the firm’s other fund, the open-ended £6.2bn CF Woodford Equity Income fund.
This fund is the second best performer in the IA UK Equity Income sector since its launch at the beginning of June 2014 with a return of 19.22 per cent versus a peer average of 8.47 per cent. The FTSE All Share gained 5.32 per cent over the same period.
Performance of fund and sector and since launch
Source: FE Analytics
While this fund focuses on the large-cap equity income stocks that Woodford is well known to favour, his trust invests in the long-term growth potential he believes exists in early-stage businesses that are often not listed on public stock exchanges and in many cases are a ‘pre-revenue stage’, which makes measuring their value difficult and volatile.
The trust’s portfolio will be biased towards the blue-chip income stocks usually associated with the FE Alpha Manager to begin with but these much smaller companies will be gradually added, with much of it in private equity, Elliott says. He insists investors should buy the trust on a long-term view and not get too concerned with short-term peaks and troughs.
“It is going to be a mixture of unquoted and quoted companies. It is going to take up to two years to be fully invested and we haven’t' had any visibility on the portfolio yet. People bought this very much on a long-term view – there is a clue in the name. It is about long-term returns,” he said.
“Also, as there are some unquoted positions, the valuation points are quite interesting and you can make an argument for it trading at a premium which it has done from launch.”
Scouller says the investment period may be prolonged, given the increased size of the fund at IPO from the targeted £200m to the £800m outturn.
He adds the unquoted component of the portfolio is likely to take some years to fully develop and bear profitable fruit which is not properly reflected in the current high share price.
He concluded: “In the listed fund sector, we think excessive premia can be as big a problem as excessive discounts and can lead to unwanted volatility in share prices.”
“We note the board can issue the industry standard 10 per cent of share capital on a premium without seeking further shareholder authority. However, the board may be reluctant to use this at present, given the likely high cash weighting in the fund.”
“At the present time, we think a fairer valuation is for the shares to trade close to NAV, ie 103p rather than the 116p at which the shares are currently trading,” he said.
Elliott adds that investors do need to be mindful of discount volatility particularly in certain trusts.
“It has been an issue for some trusts such as those owning solar farms. You can't have a discount control mechanism that is not suitable given your assets. With Woodford given it is going to have a high element of unquoted, you can’t make a promise or a line in the sand because clearly a lot for your money will all locked up for quite a long time,” he said.
“However, as Neil Woodford is very passionate about this, it is a long-term thing and very much a legacy product as he is concerned. We would be very surprised to see an extended premium or discount and I think they would use the resources available to them to buy back shares if necessary.”
A spokesman for Woodford said any decision on discount/premium control would be a matter for the trust's board.