Investors should avoid buying into the hugely popular Woodford Patient Capital investment trust despite its move to a discount for the first time ever, according to analysts at Numis Securities and Stifel.
Headed by star manager Neil Woodford, the trust was the largest launch of any closed-ended vehicle in history when it listed in May 2014. With the very well-regarded manager targeting a long-term return of around 10 per cent per year, an innovative fee structure and an on-trend investment case, demand was always going to be high.
Woodford Patient Capital has a strong focus on early-stage companies both quoted and unquoted within areas such as life sciences, healthcare, energy, utility, technology and particularly in firms with ‘disruptive’ technologies.
Due to the high demand and limited supply the trust moved rapidly to a premium of more than 15 per cent in just three months.
Performance of Premium/discount since launch
Source: FE Analytics
However, it has been a tough time for the Woodford Patient Capital trust particularly since it published its first quarterly results last August.
At that stage it was up 19.3 per cent whereas now it is down 12.93 per cent. The trust is on a discount of 0.3 per cent today.
However, according to our data, it is beating FTSE All Share’s loss of 13.89 per cent but not the IT UK All Companies sector’s average loss of 5.64 per cent.
Performance of trust, sector and index since launch
Source: FE Analytics
The omnipresent bearish sentiment in 2016 is the clear reason for the Woodford Patient Capital trust’s move to a – admittedly – small discount which has particularly hit healthcare and biotech hard.
Charles Cade, head of investment companies research at Numis Securities, says he doesn’t think it is a good time to buy as the discount could widen further from here.
“In my view there is a risk that the discount could widen further if the market conditions remain challenging. The share price of 86.8p is well down from the 100p at launch and compares to a peak of 119.3p in October when it was trading at a substantial premium to net asset value [NAV].”
“The current price clearly offers a better entry point, but it needs to be recognised that Patient Capital has a very different risk profile from Woodford’s Equity Income funds, with 63.5 per cent invested in healthcare - much of it early stage - and 59.2 per cent in unquoted assets.”
“We had been recommending selling the fund when the premium was high, whereas we are neutral on the stock at present.”
Stifel’s head of research Iain Scouller, who has had a sell rating on the trust since its rapid move to a double-digit premium back in June 2014, has recently promoted the trust to a ‘hold’.
“The significant premium the shares were trading on over the summer has now deflated, with the shares more 'sensibly priced' rather than 'cheap'.”
“We are upgrading our recommendation to ‘hold’ from ‘sell’ and think the shares should trade close to NAV, rather than on a large premium, given the immaturity of the portfolio, with many of the unquoted investments expected to take some years to mature and be realised through IPOs or sales.”
Woodford manages the trust through his firm Woodford Investment Management, the company he founded after his exit from Invesco Perpetual where he had worked for more than 25 years, last year.
A spokesman for Woodford recently said the largest detractors to the trust’s performance came from the US biotech sector which – as shown below - has been hard over the past year.
Performance of index over 1yr
Source: FE Analytics
“Prothena fell heavily despite the lack of any significant news over the month – the move was symptomatic of the extremely negative sentiment towards US biotech in recent weeks. The Nasdaq Biotechnology Index has now declined more than 30 per cent from its peak in July 2015, and was down over 20 per cent in January alone,” he said.
“Less than 10 per cent of the portfolio’s assets are invested directly in US biotechnology companies, but the adverse trading conditions had a significant influence on trading in health care shares on this side of the Atlantic too.”
“Looking forward, we remain very excited about the shape of the portfolio and its long-term return prospects. It’s important to draw a distinction between short-term performance that is driven by the evolution of fundamentals and that which is driven by market sentiment.”
Unusually the trust has a fee structure that has 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.
