Investors should approach star manager Neil Woodford’s underperforming Woodford Patient Capital investment trust with caution, according to some investment professionals, who warn it may not necessarily be the bargain that it appears to be.
This comes following the £907m trust’s widening discount, which currently stands at 9.2 per cent compared with its one-year average of 4.34 per cent.
Since its launch in April 2015, the trust is down 17.51 per cent compared to an average gain of 22.84 per cent from the IT UK All Companies sector.
Performance of trust vs sector since launch
Source: FE Analytics
Investors should note that Woodford adopts a very long-term time horizon when positioning the portfolio, which has a significant allocation to university spin-outs and technology-based start-ups. 
It also has a markedly concentrated portfolio, with its 10 largest holdings accounting for 67.4 per cent of the overall trust. Its largest individual constituents are biotech company Prothena at 15.63 per cent, unquoted electronics manufacturer Oxford Nanopore at 8.94 per cent and online estate agent Purplebricks at 8.01 per cent.
In an article published earlier this year, Woodford (pictured) told FE Trustnet he made it clear to investors at launch that they need to be patient and invest for the long term, given his focus on very small and innovative companies.
“There are plenty of examples of companies that have done incredibly well in [Woodford Patient Capital],” he said at the time. “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.”
However, not everybody believes the trust’s current discount presents a buying opportunity.
One investment manager, speaking on condition of anonymity, said one of the main issues with the investment vehicle is that it raised too much money. As such, it became unable to invest in small start-ups – its original aim.
“This was a case of Neil Woodford trading on his name and taking advantage of the situation,” they said. “Performance across all of his funds has been dreadful and whilst he hasn’t become a poor fund manager overnight, I had been selling down his funds even since the Invesco days.
“I think another problem is he had one style (essentially investing in utilities and tobacco) which is what made his name after 2000 – let’s not forget his consistently fourth-quartile performance in the late-90s.
“However, as this attracted so much money to his funds over the subsequent years it became too big and forced him to invest outside of his comfort zone. So no, I wouldn’t touch Patient Capital.”
Victoria Chernykh, senior research analyst at Panmure Gordon & Co, believes the trust’s discount could well be the result of hot retail money flowing out from short-termist investors who bought into a star name.
“Some trusts (including ‘troubled’ trusts) trade at a discount for a long time. In this case not all the single holding issues might be priced in. If they are priced in, this could be a good entry point,” she said.
Chernykh added: “Many holdings in [Woodford Patient Capital] are illiquid. This means the trust can experience lengthy periods of poor performance until the manager is able to generate profits from his investments.
“In addition, the manager’s good reputation was built running large-cap liquid funds and he might potentially struggle with less liquid portfolios.”
Alex Paget, research analyst at Kepler Partners, said investors need to remind themselves the portfolio is highly concentrated and dependent on Woodford’s ability to pick the right companies.
However, he admitted some investors may be frustrated at some of the individual stock blowouts which have hit the portfolio.
Earlier this week, for instance, Prothena’s share price fell by 15 per cent following the delay of its test read-out from its ongoing Vital trials.
“It does come back to the point of the trust – it is called ‘Patient Capital’ – you’re supposed to be backing it over the long term. There will be people who bought into it without really getting on board with this investment objective,” Paget reasoned.
“Although it has had some pretty nasty stock-specific falls, [Woodford] is deserving of the benefit of the doubt going forwards. He himself will be annoyed with how things are going.
“I think at its current discount of almost 10 per cent – which you haven’t seen since launch – it does look quite good value in that sense.”
Another point to note, according to the research analyst, is that the trust will continue to have a large retail investor following which will heighten the volatility of its discount.
“If you’re going to buy it, you have to know that you are buying it alongside a lot of retail investors who will fly at the first sign of panic,” he continued.
“Its discount is appealing but this will remain very volatile because, any time there’s bad news surrounding the underlying portfolio, the discount will just blow out.”
The research team at Winterflood described Woodford Patient Capital as a high-risk but potentially high-return investment vehicle.
It said the vehicle remains a unique mandate that is only possible as a result of its manager’s reputation, network and experience.
“While it is still relatively early, the portfolio is already showing signs of evolution, particularly in terms of its concentration and asymmetric returns,” it explained.
“We would also note the strong link between the fund’s rating and NAV performance, with the discount having widened recently following a decline in NAV.
“We believe that Woodford Patient Capital is a high-risk, potentially high return fund that suits long-term investors who are comfortable with the fund’s risk profile.”