US biotech firms such as Prothena, Verseon and Northwest Biotherapeutics are among the stocks Neil Woodford has bought in his new the Woodford Patient Capital Trust, according to its first half-yearly financial report, which raised £800m during its IPO earlier this year.
In what was the biggest ever investment trust launch of all time, the manager (pictured) of the Woodford Patient Capital Trust is treading new territory for himself focusing largely on small, often unquoted companies and ‘early stage’ businesses as well as by launching an innovative fee system.
Today, with more than 75 per cent of the cash invested and the last portion expected to be deployed by the end of the year investors have the clearest vision yet of how the manager, one of the most highly regarded in the UK equity space, plans to grow investors’ stakes over the long term.
Woodford has typically had a bias toward mega cap conglomerates and blue-chips and he has not completely stayed away from names such as AstraZeneca, GlaxoSmithKline and Rolls-Royce in this portfolio.
However, the vast majority of firms now making up the trust will be less familiar with many of the trust’s investors than those who have followed the manager over the longer term at Invesco Perpetual and more recently in the CF Woodford Equity Income fund.
Healthcare – that some may also term biotechnology - is clearly the dominant theme represented in the portfolio with the six largest holdings all in the sector and more than half of the 49 firms that make up the full portfolio sitting in the sector.
Source: Woodford IM
The three largest holdings Prothena, Verseon and Northwest Biotherapeutics, making a collective 12.73 per cent, are all US biotech firms listed on the NASDAQ index. The next largest Proton Beam Partners is a scheme to launch three proton-beam cancer treatment centres in England and Wales and is the largest unquoted holding in the portfolio.
Other unquoted names include Oxford Sciences Innovation which the manager believes does exactly what it says on the tin, describing it as a “critical new link in Oxford’s science innovation infrastructure”.
Other unquoted businesses include cold-fusion specialist Industrial Heat, Cambridge-based life sciences firm Kymab, electronics manufacturer Drayson Technologies, and early stage drug firm SciFluor Life Sciences.
The manager says there are several more in the pipeline which they expect to enter the portfolio over the remainder of the year, making the £800m raised at launch fully invested by the end of 2015.
Numis Securities’ analyst Ewan Lovett Turner says he expects more holdings to be added resulting in a well-diversified portfolio of between 50 and 100 holdings.
“As expected, initial exposure has been focused on mid and large-cap, mature companies, however, exposure to early-stage companies, including unquoteds, has been gradually increasing and will continue to build over a one to two year period,” Lovett-Turner said.
Speaking of the past six months Woodford said: “Initially, our activity was focused towards building exposure to the mid and large capitalisation businesses that account for about a quarter of the portfolio. The larger and more liquid of these, such as AstraZeneca, GlaxoSmithKline, Legal & General and Rolls-Royce, we were able to build quickly and we were assisted by placings in mid-cap stocks such Allied Minds and IP Group.”
“Placings in Circassia and Oxford Pharmascience also allowed us to quickly scale up our exposure to these other exciting businesses. Positions in smaller, less liquid securities, such as Vernalis, 4D Pharma and Xeros, took longer to build but, by being patient and disciplined, we have been able to build the positions that we sought.”
According to FE Analytics the trust has returned 19.3 per cent since it launched in April while the IT UK All Companies sector returned 6.77 per cent and the FTSE All Share index fell 2.45 per cent.
Performance of trust, sector and index since 20 April 2015
Source: FE Analytics
However, most of the share price appreciation has come from the fact it quickly moved to a premium which until this morning stood at 15.1 per cent. Net asset value [NAV] moved up 5.19 per cent over the same period.
Performance of trust'S NAV since 20 April 2015
Source: FE Analytics
Lovett-Turner also notes that while Woodford is one of the best managers around, the trust has a precariously priced premium considering Woodford’s team have also been granted a ‘Tap Issuance’ allowing them to create more shares, potentially as a mechanism for premium/discount control.
“Woodford has an exceptional long-term track record and his popularity has been demonstrated by strong trading in the secondary market, which has also been supported by buying from index trackers,” Lovett-Turner said.
“We rate the manager highly and believe the mandate is interesting, however, we have been wary of the excessive premium, and believe there is potential for this to reduce over time, especially given the implementation of a tap issuance programme.”
Today the shares were down 3.19 per cent on the news moving the trust onto a 11.6 per cent premium, Numis said. This is not yet captured by FE Trustnet data.
“Our blue-chip holdings have typically detracted from performance thus far, with GlaxoSmithKline and AstraZeneca in particular showing short-term share price weakness.”
“Our US biotech exposure, principally Prothena and Northwest Biotherapeutics, has contributed positively to performance.”
He says while there are legitimate worries in this space over valuations, he has stayed away from the frothiest end of the US market.
“There is a great deal of enthusiasm in the US biotech sector about new potential treatments for cancer and in other areas of high unmet clinical need, as well as hopes of acquisitions by cash-rich pharmaceutical majors.”
“Although this has led to several US biotech stocks trading on bubble- like valuations, we have focused our exposure on stocks where future potential is, in our view, significantly undervalued by the market – Prothena, Northwest Biotherapeutics and Alkermes, all trade on valuations more in line with those we see on this side of the Atlantic.”
Outside of the health care and biotech, RM2 International is an industrial firm that has also performed well for the trust.
“The business is still at an early-stage of its development but has tremendous potential to disrupt the pallet industry. Although it has suffered setbacks over the past few years, its recent contract win with PPG International is very positive news, in our view, and could herald the broader adoption of its composite pallets, which are superior to wooden pallets in almost every way: lighter, more durable and more cost-effective, as well as more environmentally friendly,” Woodford said.
“Norwegian technology business Idex, which is developing a unique and very promising in-glass fingerprint sensor solution which has enormous potential in the tablet & smartphone industry, also contributed positively,” he added.
The full portfolio, as at the end of the interim period is available here.
The fund has an innovative fee structure with no base fee and a performance fee of 20 per cent of net asset value [NAV] returns in excess of 10 per year, subject to a high watermark and paid in shares.