This week has satisfied even the modestly curious investor in star manager Neil Woodford’s newest venture, the Woodford Patient Capital investment trust, with the first update of the portfolios’ full holdings – a move uncommon in the IT world.
As billed the trust is stuffed with ‘early stage’ companies, many of them unquoted and utilising intellectual property garnered from advanced study at some of the world’s most prestigious universities.
It is something of a new strategy for the doyen of UK equity investing, given the vast majority of career has been backing big businesses with a bias to blue chip names such as BAT, Imperial Tobacco and GlaxoSmithKline.
Performance of Neil Woodford versus peers since Jan 2000
Source: FE Analytics
This is well known and Woodford (pictured) and his team have clearly sign-posted the need to be ‘patient’ with the strategy, eying long terms returns targeted at 10 per cent per annum but with a clear emphasis on the long term.
However, one surprise of the portfolio is the huge weighting to healthcare/biotech names in both the quoted and unquoted names. Nine out of 10 of the largest holdings are in healthcare which collectively makes up nearly 60 per cent of the £823m portfolio.
Healthcare and biotech equities have been one of the best places to be invested over past four years with funds such as the AXA Framlington Biotech and Schroder Global Healthcare funds delivering sky-high returns.
The close correlation, particularly of healthcare, with the NASDAQ is due to the inclusion of much of these within this index.
Performance of funds and index over 4yrs
Richard Turnill, chief investment strategist at BlackRock’s Alpha Strategies group says broadly of the biotech and healthcare sector: “There’s a lot of money chasing these very hot growth stories. We’ve not seen these types of valuations since the financial tech bubble in the late 1990s, where valuations actually got materially higher.”
“But outside that bubble period, we’ve not seen valuations this high. History tells us that not all the companies in these sectors will be winners and it’s a case of which ones will dominate. So we see some real vulnerability in some of these very high molten stocks if we start to see volatility rise over a period of time.”
One manager who disagrees with Turnhill is Felix Wintle, manager of the US Opportunities fund. He said: “We believe healthcare is in a strong bull market and can continue to perform well. The healthcare sector is our largest weighting at just under 30 per cent of the portfolio. We have a broad spread of exposure across different sub-sectors, with a focus on innovative companies.
While only two holdings in the fund are biotech stocks actually in the NASDAQ and Woodford accepting there are reasonable worries in this space over valuations, he argues he has stayed away from the frothiest end of the US biotech 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,” Woodford said.
“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.”
Nonetheless these are richly valued equities. Take for example Prothena which is the trust’s largest position at 5.59 per cent of the portfolio.
It is priced at $60 per share and made a huge loss last year, and is projected by analysts to make a loss for the next three years, according to NASDAQ.
It is a similar story for many of the listed and unlisted stocks, and given the popularity of biotech funds among FE Trustnet readers, it begs the question of whether investors know they are increasing their weighting to the high octane sector by buying Woodford Patient Capital.
Simon Elliott, head of research at Winterflood Securities – a broker for Woodford’s trust – says while Healthcare is highly represented in the portfolio, there are investments across a variety of sectors.
“For example, an investment has been made in RM2 International, an innovative composite pallet company, and Idex, which is developing in‐glass fingerprint sensor technology.”
“In addition, the investment trust has invested in AJ Bell, a company that the team first backed during their time at Invesco, Drayson, a technology business that provides environmental monitoring, and Gigaclear, which provides broadband networks to rural communities.”
Nonetheless, he says he expects the portfolio to have a high weighting to biotech and healthcare for the foreseeable future.
“Although the portfolio will continue to evolve over the remainder of this year, we believe that the basic shape has been established. While there is a high weighting to the healthcare sector, this is through a range of business types with significantly different risk/reward characteristics.”
“In addition, there is considerable diversification through investment in companies across a wide range of sectors, albeit with technology and innovation being common themes.”
According to FE Analytics the trust has returned 15.7 per cent since it launched in April while the IT UK All Companies sector returned 5.47 per cent and the FTSE All Share index fell 4.14 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. Net asset value [NAV] moved up 5.02 per cent over the same period.
The fund has a pioneering fee structure with no base fee and a performance fee of 15 per cent of net asset value [NAV] in excess of a 10 per cent cumulative hurdle rate per annum, subject to a high watermark and paid in shares.