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Is now the time to buy Woodford Patient Capital as it gets back in the black?

Winterflood Investment Trusts research analyst Kieran Drake outlines the investment case for Woodford Patient Capital.

Jonathan Jones

By Jonathan Jones, Reporter, FE Trustnet
Monday July 17, 2017

Despite lagging both its long-term targeted return and FTSE All Share benchmark, Woodford Patient Capital presents a high-risk, high-return proposition for investors, according to brokerage Winterflood Investment Trusts. 

The recommendation came as the trust finally made a positive return for investors having spent more than 12 months in negative territory, according to FE Analytics.

The £831m trust was launched by FE Alpha Manager Neil Woodford (pictured) to maximise the potential in unlisted companies and is heavily weighted to healthcare (66.46 per cent) and financials (31.04 per cent).

It aims to return 10 per cent per annum over the longer term, but has fallen short of this target since launching.

The trust has now returned 0.67 per cent, having spent the last 12 months in negative territory, though it remains 18.65 percentage points behind its peers in the IT UK All Companies sector, as the below chart shows.

Performance of trust vs sector since launch


Source: FE Analytics

Kieran Drake, research analyst at research house Winterflood Investment Trusts, said: “Since its launch in April 2015, the performance of Woodford Patient Capital Trust has lagged both its long‐term targeted return and the FTSE All Share.”

The fund was initially successful, outperforming the FTSE All Share in 2015 on the back of strong performance by its US biotech holdings.

However, the sector was dealt a blow in the lead-up to the US general election, with Hillary Clinton seen as particularly damaging for the sector if she won.

Despite Donald Trump’s victory, the sector has struggled to recover, with concerns over the new American healthcare bill – and the president’s inability to push the reforms through – dampening returns from the sector.

Another reason for the trust’s underperformance has been the large swings in the trust’s price to net asset value (NAV), with the fund trading on a premium after it launched, before falling back to a 10 per cent discount earlier this year.

“Since Woodford Patient Capital Trust was launched in April 2015 the rating of its shares has been strongly linked to the relative performance of the NAV against the FTSE All Share, as shown in the chart below,” Drake said.

Woodford Patient Capital Trust – Premium/Discount History since launch


Source: Winterflood Securities

The fund’s shares are currently trading on a discount of 3.3 per cent though they have tightened significantly from their widest level of 10 per cent in early June.

The tightening of the discount more recently prompted the Winterflood research team to retain the closed-end fund within its model portfolio of investment trusts at the end of the first half.

At launch, the fund’s shares had traded on a premium to NAV, which grew during a period of outperformance against the FTSE All Share in its first six months.

The fund was boosted further when it was included in the FTSE 250 following the FTSE UK series index review in June 2015 and its premium peaked at more than 15 per cent.

It continued to trade on a premium for the following 12 months, but has gradually receded and over the last 12 months its shares have tended to trade on a discount to the NAV.

This has been in part due to the intense interest in the fund at the time of launch, as it managed to raise £800m in its initial public offering, with investors expecting strong returns from the start.

Yet the disappointing returns made by the fund over the last 18 months have seen investors lose patience. 

Indeed, since its launch on 21 April 2015, the trust’s NAV is up 5.1 per cent on a total return basis compared with a rise of 15.5 per cent for the FTSE All Share index.

“The fund’s share price has fallen by 0.2 per cent over the same period and has proven more volatile than its NAV, ranging between 119p and 81p since launch,” Drake noted.

So far in 2017, the fund has seen a reversal in fortunes, with the NAV up 10.9 per cent so far, which is ahead of the FTSE All Share’s 6.7 per cent. Its share price has also increased by 9.5 per cent.

Woodford highlighted the disconnect between its NAV and the progress in fundamentals of the underlying portfolio companies in the trust’s annual results, with Drake noting that the portfolio has evolved since launch.

The analyst pointed to the concentration of the top ten holdings, which has risen to the current level of 62.67 per cent as an example of this. The fund has also increased its exposure to unlisted companies.

“This trend is likely to continue as the portfolio becomes increasingly dominated by those holdings that are performing strongly, with the manager inclined to remain a long‐term, supportive investor and to ‘let the winners run’,” Drake said.

“While the level of concentration may lead to some concerns over the rise in stock specific risk, we believe that sector specific exposure is less of an issue due to the range of business models in the portfolio.”

Overall, Drake said Woodford Patient Capital “remains a unique mandate that is only possible as a result of its investment manager’s reputation, network and experience”.

“While it is still relatively early days, the portfolio is already showing signs of evolution, particularly in terms of its concentration and asymmetry,” he said.

“We believe that Woodford Patient Capital is a high risk, potentially high return fund that remains inherently attractive for long-term investors who are comfortable with the fund’s risk profile.”

Woodford Patient Capital has an ongoing charges figure (OCF) of 0.18 per cent plus a performance fee of 15 per cent of any returns over a 10 per cent cumulative hurdle rate per annum.

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Data provided by FE. Care has been taken to ensure that the information is correct, but FE 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.

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