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Patient Capital frees Woodford to double unquoted holdings

Patient Capital frees Woodford to double unquoted holdings

The board of Woodford Patient Capital Trust (WPCT) has proposed giving fund manager Neil Woodford even more freedom to invest in unquoted companies following a second year of disappointing performance.

Annual results for the fund, which raised a record £800 million in 2015, showed its net asset value per share fell 4.2% to 93.2p in 2016. However, the share price slid nearly 10% as the stock swung from a small premium above its net asset value to a 2.4% discount below NAV at the end of the year.

Unquoted companies – which are private firms that have yet to list on a public stock exchange – make up 42% of the portfolio. They generated a positive 2% return last year but this was offset by a fall of over 5% in the quoted stocks that account for the rest of the assets.

Chairman Susan Searle said analysis of the portfolio by Woodford and where its winners might come from in future had pointed to a need to relax three of the investment restrictions on the fund manager.

As a result the board has proposed shareholders should agree to:

  • lift the maximum Woodford can invest in unquoted companies to 80% from 60% of the fund;
  • remove a 30% limit on non-UK investments to give the manager more flexibility as holdings, such as online estate agent Purplebricks (PURP), expand overseas.
  • raise the amount Woodford can top up positions with a new ceiling of 20% on individual stock holdings, up from 15% previously (although a 10% cap on initial investments in individual stocks should be retained).

The last relaxation will give Woodford more headroom on Prothena (PRTA.O), the US biotechnology company that was one of his best stocks in 2016 and accounted for 14.3% of the fund at the end of the year.

Woodford said he had upped his position after the company, which is developing a treatment for Parkinson’s disease, came under attack from short-sellers. The weighting has since dropped to 12.7% but remains his top holding.

Writing his review of the year in the trust's annual report, Woodford acknowledged some investors would be disappointed with the performance but insisted the decline in net asset value in 2016 had masked progress within the portfolio.

He remained confident that returns would improve. ‘Barely a week goes by when I don't hear of something coming to fruition within the portfolio. It is only a matter of time before this starts to be reflected in the net asset value and share price of the company,’ he said.

Among his unquoted winners were a trio of healthcare companies Oxford Nanopore, Oxford Sciences Innovation and Proton Partners International which all enjoyed significant valuation mark-ups during the year.

Woodford also reminded shareholders that they had signed up to a long-term investment strategy that would not necessarily pay off in the short term.

‘For patient capital investing to be a success, one has to work through the difficult periods. My approach has always been to favour voice over exit, which means overcoming hurdles to continue to support and nurture businesses that I retain my long-term faith in,’ he wrote.

One such was Circassia Pharmaceuticals (CIRCI), whose shares slumped two thirds last year after disappointing trials of its cat allergy vaccine. Woodford has retained a 1.5% position in the fund, pointing to three other promising treatments in its pipeline plus the recent collaboration signed with AstraZeneca, the UK drugs giant that has taken a 14% stake in the company.

Disappointed shareholders can take some comfort from not being over charged for the trust's performance. Woodford Patient Capital Trust operates a rare performance fee-only charging structure which means Woodford only gets paid if annual compound returns exceed 10%. With no payment to the manager, ongoing charges paid by shareholders were just 0.2% last year, less than a fifth of the average charge of trusts in its sector.

Shares in WPCT dipped 0.4p to 91.3p today, below the 100p they floated at in April 2015. According to Morningstar data, the shares stand at a 3.8% discount below their estimated NAV per share of 94.5p.

The writer of this article holds shares in WPCT in his pension.

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