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Six months of Woodford Patient Capital: Has a buying opportunity opened up?

30 October 2015

The past three months of Neil Woodford's investment trust have contrasted with the strong gains of its first three months, with valuations now close to its oversubscribed debut.

By Daniel Lanyon,

Senior reporter, FE Trustnet

Investors should refrain from buying or adding to the Woodford Patient Capital Trust at the present time due to the potential for further weakness in its share price, according to Numis Securities’ Charles Cade.

It has been a tough three months for markets in general since Neil Woodford’s trust published its first quarterly results in August.  Back then anyone who managed to bag some shares when it listed was up 19.3 per cent; now it is up just 3.7 per cent.

Launching to much fanfare six months ago, the Woodford Patient Capital Trust is still very much in its early stages. The cash raised by its initial public offering of £800m and further issuance totalling £30m is now close to being fully invested but given its long-term strategy these investments are very far from realised.

Of course, the main message in the proposition is that it is meant be a genuinely long-term investment subject to volatility hence the word ‘Patient’ within its name.

According to our data, the trust has returned 3.7 per cent since its stock market debut at the end of April, beating both the IT UK All Companies sector’s average return of 2.91 per cent and the FTSE All Share’s loss of 6.2 per cent.

Performance of trust, sector and index since launch

 
Source:
 FE Analytics


However, this is a far stretch from its August high when the trust has delivered a near 20 per cent total return, mostly due to its move to a double-digit premium. This premium has since fallen to 7.8 per cent.

Some of these gains were due to its inclusion in the FTSE 250 index during its rebalancing at the beginning of the August, as demand for the shares ramped up as index trackers were compelled to buy in.

The net asset value (NAV) of the trust has actually fallen 2.23 per cent since its launch as after its August high the ‘Black Monday’ sell-off hit many of its individual holdings. Healthcare stocks, which the trust has a bias to, then lagged in the subsequent rally, which favoured bombed-out energy and mining stocks.


Cade – head of research at Numis Securities – thinks while the price of the trust may have fallen to a more attractive level than it was previously, there are too many unknowns about the strength of the macro environment to support buying it now.

“The share price is down about 10 per cent over the past three months and so it is better than it was but we are neutral until we see a bit more and understand it a bit more. We are still concerned that premium could come off more in the near term. You could see a fair bit of downside from here,” he said.

“It is more to do with the broader environment not being supportive to the type of things he holds, which can take knock and then you start to see people selling out and you could see that come off. He still has a fair bit to prove in terms of the whole model.”

Woodford (pictured) manages the trust through his firm Woodford Investment Management, the company he founded after his exit from Invesco Perpetual last year, where he had worked for more than 25 years.

He is one of the industry’s most highly regarded managers due to the strong returns while running Invesco Perpetual Income, Invesco Perpetual High Income and, more recently, CF Woodford Equity Income. Over the past 15 years he has more than tripled the return of his peer group composite.

Performance of manager and peer group over 15 years


  

Source: FE Analytics


Cade was one of the few trust analysts who advised investors to sell out back in August and take the rapid profits from the quickly rising premium.

“We felt the premium was too high and so we put it as a ‘sell’ because the premium was way too excessive. It has come down now but it is still on a 7.8 per cent premium.  So I wouldn't say it is particularity cheap on a pure valuation metric,” he said.

“Longer term, if you are buying it nearer its issue price then it is certainly a better time to than it was. It has an attractive fee structure and he clearly believes in the whole area [of investment].”

The fund has an innovative fee structure with no base fee and a performance fee of 15 per cent of any excess returns over a 10% cumulative hurdle rate per annum, subject to a high watermark.


Winterflood Securities analysts Simon Elliott and Innes Urquhart-Stewart believe it is a good time to buy. It must be noted that Winterflood is a broker for the trust.

“Woodford Patient Capital Trust is a natural extension of the investment approach that Neil Woodford has honed over a number of years,” Elliott said.

He adds that as Woodford has already backed “numerous” public and private early‐stage and early‐growth firms, he thinks there is significant upside potential.

“The possible upside is clearly significant and, although there will be failures given the often binary nature of these businesses, we believe the potential exists to generate attractive long‐term absolute returns,” he said.

However he says it is hard to predict precisely how the portfolio will perform due to its unquoted exposure of up to 60 per cent, which is significantly higher than the 5 per cent in Woodford’s open-ended CF Woodford Equity Income fund.

“We would expect the first few years of the trust to see limited valuation growth from the unquoted holdings, unless specific holdings encounter early successes.”

The £7bn CF Woodford Equity Income fund is the best performer in the IA UK Equity Income sector since its launch at the beginning of June 2014 with a return of 22.22 per cent versus a peer average of 5.13 per cent. The FTSE All Share gained JUST 0.12 per cent over the same period.

Performance of fund and sector and since launch


Source: FE Analytics

 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.