University spin-outs and technology-based start-ups offer a wealth of stellar investment opportunities, according to Neil Woodford (pictured), although he pointed out that investors need to retain genuinely long-term time horizons in order to reap the benefits. 
He also warned that, without the support of investors, many of these companies creating life-changing products and generating wealth for the UK economy could struggle.
However, the manager of the £828m Woodford Patient Capital Trust said many investors are averse to this market area or are perhaps too impatient to benefit from exposure to such stocks.
“I think the mood music is, to some extent, dictated by some relatively negative sentiment towards start-ups,” Woodford explained. “It comes with the territory but we should be celebrating the fact we have unbelievably good technology businesses here in the UK, on which the future wealth generation of this country will depend.
“Our ability to pay for all the things everybody wants in the UK will be a product of the wealth generation that these companies are able to deliver, in part. And if they don’t deliver it, we’re going to have a poorer future than the one I think we will have, which is a richer future as a result of the wealth for the nation that will be created.
“By wealth creation, I mean what the knowledge economy can deliver to the UK by employing highly-skilled people, by paying taxes, by delivering growth to the economy. Those are the things I think people should be celebrating.”
The FE Alpha Manager explained that negative sentiment towards such companies can be debilitating for the underlying businesses as it can encourage risk aversion and a lack of ambition. Given that many research institutions and universities are funded by the tax-payer, he warned that these firms won’t receive enough funding to continue their work in the future if investors continue to misunderstand these businesses.
“There are plenty of examples of companies that have done incredibly well in [Woodford Patient Capital],” Woodford added. “I am equally aware that we haven’t yet proven it. The NAV is £1 and it has to be substantially higher than that, but I believe that it will be.”
Woodford Patient Capital has been criticised in the past for underperforming its average peer since its launch in April 2015.
While the IT UK All Companies sector average has returned 20.1 per cent over this time frame, Woodford’s trust is currently down 6.34 per cent. As a result, it is currently trading on a discount to NAV of 7.1 per cent.
Performance of trust vs sector since launch
Source: FE Analytics
However, Woodford has made it clear to investors since before the trust’s launch that, given its focus on very small and innovative companies, they need to be patient and invest for the long term rather than looking over two-year time horizons.
“On the whole, the feedback we have received from clients has been very positive,” the manager said. “We get very positive engagement from investors when we talk about what we’re doing in the portfolio.
“We try very hard to educate and to profile the businesses we think we need to highlight to investors in that fund and I’m incredibly excited about where the portfolio is and what it can deliver.”
The biggest individual weighting in the trust’s portfolio is Prothena, which is also a significant holding in CF Woodford Equity Income (as explained in an article earlier this week).
The US company was spun out of Elan, an Ireland-based global pharmaceutical company Woodford held during his time at Invesco Perpetual.
“Prothena was spun out of Elan as a drug development business, so I have known Prothena for a very long period of time and I hold the drug development skill-base in that business in very high regard,” he explained.
“The team there has been together for well over a decade working on a specific area of human disease and drug solutions to human disease. That area is building towards what I think will be a very successful outcome.”
Elsewhere in the portfolio, Woodford is particularly excited about the prospects for Oxford Nanopore Technologies, an electronics manufacturer that he has been familiar with for many years.
“Again this is a company we’ve been very patient with over time,” he said. “We’ve had numerous opportunities to invest and back the technology and people in the business.
“They’ve done a fantastic job. It’s taken longer than we would have liked and than we thought it would to get to the point where that business is commercialising and commercialising rapidly. That is a really interesting business too.”
Generally speaking, the manager said the UK “punches above its weight massively” when it comes to research capabilities and technological advancement (Woodford is also positive on the UK economy outside of uncorrelated start-ups). For example, he pointed out that three of the 10 best universities in the world – Oxford, Cambridge and Imperial College – all reside here.
“When you think about the world population, the fact that a tiny little country on the edge of Western Europe can deliver those results tells you something about the intellectual capability of this economy,” Woodford continued.
“That has been the case since the 18th century. From Newton all the way through to the modern-day scientists who are helping to unlock many of nature’s secrets and many of the challenges the world faces today, the technology on which much of that is based is developed in the UK.”
While he said there are areas of the technology market that the UK particularly excels in - such as healthcare – he explained that the composition of the portfolio doesn’t necessarily reflect the strengths and weaknesses of the home market’s intellectual property base.
“Some things are less fruitful from an investment perspective because, when you have the social media monoliths such as Google and Facebook scanning the world for any sort of technology that is either deemed to be important and they have a pretty unlimited chequebook, there are some types of businesses where that technology is priced out of my reach.”
The manager is keen to point out that, while investing in small start-ups is indeed socially useful, he would of course only invest in early-stage British businesses if the valuations were attractive and if they could offer significant upside potential to his investors.
“I’m very passionate about the job I do,” Woodford said. “It is something I enjoy doing but it is something I feel very strongly about on an emotional level. It’s not just a job for me – I’m very conscious of the responsibilities that we have as a business towards the people that trust us with their money.
“I would be worried if the fund manager looking after my money wasn’t passionate about what they were doing. That doesn’t mean I’m getting mentally out of shape when things go badly, it just means that I’m very involved in this and I feel very committed to it.”
Woodford Patient Capital is 9.7 per cent geared and has an ongoing charge figure (OCF) of 0.18 per cent. It also has a performance fee, which equates to 15 per cent of any excess returns over a 10 per cent hurdle rate per annum.