Investors have until 14 April to apply for initial access to the Woodford Patient Capital Trust, with the first pricing set for a week after.
A recent FE Trustnet poll confirms something else we already knew – demand will be high. Thirty-eight per cent of the 1,358 investors and advisers who responded said they were planning on putting their money to work.
Woodford is one of the greatest fund managers of his generation, thrashing his natural FTSE All Share benchmark and UK equity peer group over the long-term. He has taken a keen interest in unquoted and early stage businesses for many years, running more than £1bn in such companies when working at Invesco Perpetual.
It’s hardly a surprise therefore that investors are flocking to the new trust. Woodford Investment Management is targeting £200m at launch, though is in a position to accept up to £500m. Most industry experts believe the target figure will be met, with some predicting assets of £300m or even £400m.
Performance of manager, peer group and index since 2000
Source: FE Analytics
The closed-ended structure is tailor made for the kinds of companies Woodford is targeting. He won’t have to contend with mass inflows or outflows, which would prove difficult for even he to manage given the illiquidity of some of his holdings. Moreover, the structure puts a lid on asset growth, ensuring that he has enough flexibility to hold even the smallest companies.
The cost structure is another big draw. The firm will not levy an annual management fee, instead opting for a 15 per cent performance fee on all annual returns in excess of 10 per cent. This effectively means investors will only have to pay if Woodford makes double digit returns over a 12 month period – no mean feat.
The trust will charge an estimated 0.35 per cent for running costs based on £200m under management, though it’s understood this figure will fall if and when assets rise. While the ongoing charges figure (OCF) is likely to be 0.35 per cent at launch, Woodford will hold an estimated 25 per cent of assets in large cap dividend payers, which should create an income that more than covers the fee.
There’s a huge amount to like about the trust for a long-term investor. No doubt some are looking to make a fast buck by selling the trust on a high premium straight away, but the best way to approach a product like this is to buy, hold, forget about – and hopefully make some money in 10, 20, 30 years’ time.
I’m not completely sold however; there are a few issues that are stopping me from investing at the moment.
The first consideration is that of the manager himself. While he has experience running early stage and unquoted money, he has never run a fund dedicated to it. It’s very difficult to gauge just how successful his holdings in the Invesco Perpetual Income and High Income funds were, as overall returns were driven by his high conviction large cap stock and sector positions.
I’m pretty relaxed about this issue, for the simple reason that there are very, very few funds that focus on early stage businesses. The lack of analysts and fund managers covering these companies could see a proven stock picker like Woodford (pictured) have a genuine edge over other UK equity managers. There are certainly risks involved, but I would envisage this being a satellite holding in my ISA, accounting for no more than 5 per cent.
I already invest in Woodford’s Equity Income fund via a monthly savings plan, and naturally am very pleased with my decision; FE data shows it is up 18.09 per cent since launch, easily outstripping its sector and benchmark. This, however, is where my reservations with the new venture from a personal point of view start.
Performance of fund, sector and index since launch
Source: FE Analytics
As mentioned earlier, around 25 per cent of the fund will be invested in the kind of large cap dividend payers that dominate CF Woodford Equity Income, which means there will be significant overlap between the portfolios. No details have been made of the trust’s top-10 at launch, but I’d be very, very surprised if AstraZeneca and GlaxoSmithKline aren't in it.
I already have sizeable exposure to these kinds of companies via not only CF Woodford Equity Income but also Trojan Income and Invesco Perpetual Global Equity Income.
Twenty-five per cent overlap I can deal with, but Woodford Investment Management says there is likely to be more than this figure invested in large caps at launch, admitting it will look and feel very much like the Equity Income fund. The difficulty of building positions in such illiquid companies means it could take up to two years for the trust to look exactly as Woodford wants it, though I understand this is a very cautious estimate.
The trust is also likely to have a sizeable chunk of its assets in cash, to help make the transition into smaller and smaller companies as smooth as possible. Exactly how much it will have in cash and large caps remains a mystery, which in itself makes me wary.
I’ve decided to sit on my hands for now, and wait until the trust is the finished article before I put my money to work. I acknowledge there is a potential risk in doing this; demand for the Patient Capital Trust could see it go onto a premium to net asset value (NAV). In 12 or 18 months’ time, it may be too expensive for me to even consider. However, in keeping with the trust’s mantra, I’m going to be patient – I don’t feel comfortable making an investment decision based on future expectations of discounts and premiums.
So what do the experts think of my decision? Not a lot, to be perfectly honest! Both Rowan Dartington’s Tim Cockerill and Hargreaves Lansdown’s Mark Dampier plan on buying the trust, believing I am over-thinking the potential pitfalls.
“Yes it’s perfectly true that it won’t be exactly as he wants it to look. However, if I were to have one criticism it would be that you’re trying to be too clever,” said Dampier.
“The reason I’m looking to buy it is because it’s the kind of thing you stick away for 10 years or more. Trying to finesse the decision may make sense, but I think you’ll find a lot of people who don’t buy it now will never buy it. They’ll either find an excuse not to buy it, or forget about it.”
“Who knows, there might be a situation where it ends up like Anthony Bolton’s [Fidelity China Special Situations trust] and falls onto a steep discount, and you’d be proved right. However, as I say you may be trying to be too clever.”
Dampier adds that the issue of investment trusts going onto stark premiums at launch is an annoyance when buying closed-ended funds. Even a long-term investor with the best intentions could be tempted to sell, he says.
“I bought the Sanditon Investment Trust at launch, which went onto a 13/14 per cent premium. It’s come off a bit since then, but I must say it did cross my mind to sell it and buy it back again at a cheaper price,” he said.
“It’s a problem with investment trusts. I’m inclined to keep patient and sit on my positions, but it certainly gives you a decision to make.”
Performance of trust since launch
Source: FE Analytics
Dampier’s decision not to sell out of the Sanditon trust has cost him around 9 per cent in performance, though as he suggests market timing is a hugely difficult exercise without the benefits of hindsight.
Two other trusts that went onto a hefty premium at launch in recent years were Terry Smith’s Fundsmith Emerging Equities Trust and Philip Rodrigs’ R&M UK Micro Cap Growth Trust, even though they started with high levels of cash.
Cockerill echoes Dampier’s view, adding that Woodford’s high cash weighting actually complements his current outlook.
“I understand where you’re coming from, but it doesn’t really concern me,” he said. “The trust has a very clear, straight forward strategy. It may take one year to get there, it may take two, but in the meantime the make-up of the trust isn’t risky.”
“We’ve got an election coming up, so I don’t see cash and dividend payers as being a particularly bad place to be invested.”
“The risk is that if you wait until it’s fully invested, the share price has already gone up and it’s sitting on a bigger premium. I think it will probably come to market on a premium. You’ll probably get a few people selling right away to make a profit, and the premium might drift down as some impatient investors become disappointed with performance. However, there is the risk of this going against you.”
I see a lot of sense in both Dampier and Cockerill’s comments, and who knows, I may change my mind by 14 April. At the moment I’m sticking to my guns though – just.
What do you think? Are you buying or avoiding Woodford’s new trust, and why? Tell us in the comments section below or email us at editorial@financialexpress.net.