A challenging macroeconomic backdrop along with stock-specific disappointments such as Northwest Biotherapeutics have been the main drivers of the Woodford Patient Capital Trust’s poor first year, according to manager Neil Woodford. 
The trust was the largest launch of its kind when star manager Woodford brought it to market in April last year, with investors clamouring to gain exposure to his stellar long-term track record, the trust’s focus on early stage companies and its innovative fee structure.
While shares in Woodford Patient Capital initially jumped to a substantial premium to NAV (peaking at 15 per cent), a fall in sentiment towards risk assets, poor NAV performance and negative press towards one of its largest holdings have caused that premium to fall to a slight discount.
As a result, Woodford Patient Capital has lost 11.5 per cent since launch – meaning it has underperformed relative to both the FTSE All Share and its IT UK All Companies sector over that time.
Performance of trust versus sector and index since launch
Source: FE Analytics
Although the graph above shows the trust’s total returns over the period, FE data shows it has also lost 9.5 per cent in NAV terms.
However, in his first annual report, Woodford said investors need to remember the aim of the trust when analysing its performance. While he admits it has been a tough year, the manager says his objective is to deliver long-term outperformance by backing some of the most exciting young businesses in the UK and elsewhere in the world.
“Clearly, we would prefer to be reporting on a period of positive progress for the portfolio in net asset value terms, but it is still very early days for this long-term strategy and performance should be viewed in the context of the overall market environment since launch,” Woodford (pictured) said
“The performance of the trust should not correlate closely to that of the broader UK stock market in the long term, but the quoted element of the portfolio and, in particular, our large cap positions are exposed to the slings and arrows of market sentiment which, in the period under review, turned increasingly negative.”
Outside of its performance, Woodford Patient Capital PLC has also announced it is no longer looking to raise more capital, with the board citing the poor sentiment towards risk assets as the primary reason behind the decision.
The manager points out, though, that he has been pleased with the overall performance of the underlying portfolio.
“We would be concerned if the share price performance of our investee businesses had been prompted by disappointing operational progress. In most instances, in fact, the opposite is true – we have been very pleased by the fundamental performance of the vast majority of our holdings, many of which have actually exceeded our initial expectations.”
He added: “There are, of course, one or two exceptions.”
These include the likes of RM2 International, the global pallet supplier. Woodford notes that while the company announced some very positive contract wins, it also needed to make minor modifications to the coating it applies to its pallets, resulting in delays to its production.
It means that over the past year, the AIM-listed stock (which makes up 1.18 per cent of the trust today) has fallen some 31 per cent in share price terms.
Performance of stock over 1yr
Source: FE Analytics
The most documented stock disappointment, however, has been Northwest Biotherapeutics.
The company – which Woodford owns a 20 per cent plus stake in – was in the press for all the wrong reasons last year as its chief executive officer was accused of material misconduct and dodgy dealings. The manager notes that the biotech firm, which aims to harness the power of the body’s immune system to fight cancer, has been the biggest detractor to his trust’s performance.
“Since we first invested, allegations of financial improprieties and regulatory failure have been published by at least one anonymous source,” Woodford explained.
“We have engaged with the board on this matter and in a public filing to the US Securities and Exchange Commission, we called for the appointment of an independent non-executive director and the convening of a special committee to investigate the allegations. Accordingly, the company has initiated an investigation and we await its findings.”
The stock still features in the portfolio, but is now Woodford’s 24th largest holding, making up just 1.63 per cent of the trust’s total NAV.
With the benefit of hindsight, it is almost unsurprising that Woodford Patient Capital has disappointed given the excessive amount of press attention it received and the staggering £800m it initially raised.
There is no denying that certain members of the industry have drawn comparisons between Woodford launching a fund into an area of the market he isn’t necessarily known for – his performance over the longer term has been driven by large-cap income-paying stocks – and Anthony Bolton’s perceived ill-fated tenure on the Fidelity China Special Situations trust.
Performance of trust versus index under Bolton
Source: FE Analytics
It must be noted, though, that while many analysts still view Bolton’s change of focus from the UK equity market to China as a disaster, Fidelity China Special Sits did outperform its benchmark while he was at the helm.
However, with the trust now trading on a discount to NAV (0.8 per cent) and after a period of poor share price performance, what should investors be doing with Woodford Patient Capital?
Charles Cade, head of research at Numis Securities, is meeting with Woodford later this week and says that while an attractive entry point may have opened-up for long-term investors, he understands why some of them may have more mixed feelings towards the trust over a shorter time frame.
“All I’d say is that when you get a vehicle which invests in early stage companies and it moves on to a significant premium, unless you see very favourable conditions, the danger is that the shares can move onto a discount,” Cade said.
Discount/premium on Woodford Patient Capital
Source: FE Analytics
“The trust clearly benefits from an innovative fee structure and differentiated mandate, but I’m still very much neutral on it at the moment as I will have a far better idea after I have spoken to him. If you are buying for the longer term, then now may be an attractive time to buy, but the question is what may happen to the shares over the shorter term.”
“Of course, the name of the trust gives it away and I have sympathy with Woodford’s view that the trust’s performance shouldn’t be judged over one year. Inevitably, though, that is what many investors will do.”
Nevertheless, Woodford is very confident in his current portfolio – which includes 34.64 per cent in unquoted assets as well as 46.1 per cent and 23.33 per cent, respectively, in early stage and early growth companies – to outperform from here.
“Looking ahead, 2016 is shaping up to be another challenging year for financial markets, but we are tremendously excited about the long-term potential in the portfolio that we have built,” Woodford said.
“The realisation of future long-term value will be determined by the fundamental progress made by the companies in which we have invested, not by market sentiment. We have invested in some incredible businesses with massively disruptive technologies and high growth potential.”
“Some of these businesses may take a long time to fulfil their potential but the stock market is not well endowed with patience, particularly in volatile conditions. Periodically, this manifests itself in share price weakness, especially in businesses with no earnings or dividends and relatively limited market liquidity.”
“Share price weakness in listed early-stage businesses tends, therefore, to reflect this lack of patience from investors, rather than a lack of fundamental progress by the companies. Therein lies the opportunity for patient capital to exploit.”
“The portfolio is in excellent shape and we continue to view the future with great confidence.”
The trust isn’t geared and has a pioneering fee structure with no base fee, but a performance fee of 15 per cent of any excess returns over a 10 per cent cumulative hurdle rate per annum, subject to a high watermark.