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Woodford must be Patient to earn crust on trust
Neil Woodford needs to grow his Woodford Patient Capital trust by over 35% to make any money from it this year.
When it launched last year one of the investment trust's selling points, aside from its focus on early stage healthcare companies, was its innovative performance fee structure which sees Woodford's company, Woodford Investment Management, paid only if the trust grows its investment portfolio by more than 10% a year. Note, this is measured by the growth in the trust's net asset value (NAV) not the performance of its share price.
A separate annual expenses charge is also levied, although it is not expected to exceed 0.2% and Woodford does not derive any revenue from it.
With the biotech sell-off having dented the trust's net asset value, Woodford will fail to earn a fee for his performance last year, and it will take a stellar run if he is to make any money this year.
Woodford's first opportunity to earn a fee came at the end of 2015, in a shortened financial year for the trust covering the period from its launch on 21 April. To earn his fee, the manager had to deliver NAV per share of 106.96p (based on a pro rata calculation of the 10% annual hurdle over eight months). However, by 31 December the NAV stood at around 97p per share, well below that.
Had he cleared that hurdle, Woodford would have received 15% of returns above the 106.96p mark.
Since then, the NAV has fallen further, leaving Woodford with an even tougher challenge in winning his fee for 2016. The hurdle for a 2016 payment is set at 10% more than 2015's 106.96p target, or 117.65p.
The latest NAV for the trust, at Thursday's close, was 86.7p. This means Woodford needs to grow the portfolio by 35.7% this year to even clear that hurdle, and more than that to make any money.
The nature of early stage investing, particularly with unquoted companies, means that when they go well, they can deliver spectacular returns: witness the 491% return on the Woodford Equity Income fund's investment in biotech business Stratified Medical, and the similar performance delivered by its investment in online estate agent Purplebricks (PURP), which has since listed on the Alternative Investment Market. The trust will need more investments like these if Woodford is to earn a fee for 2016.
There's no sign from Woodford of any lack of confidence. Just last month the trust announced it was considering raising more money given the 'ongoing pipeline of investment opportunities'. And while that move drew criticism from some investors given the trust's lacklustre returns to date, it's worth noting that Woodford won't garner any fees on that new money unless he delivers some striking outperformance.
Funds cash out
Some early investors have already headed for the exit, however. They include Paul Smith, manager of the Sentinel Defensive fund, who bought a £902,545 stake in the trust only to then sell out at a profit, for £954,330, thanks to the premium to NAV that has built up on the trust's shares, hitting 15% at its peak. Likewise the Seneca Diversified Growth fund and the Smith & Williamson Multi-Manager Global Investment fund.
Some, including readers of this site, sold shares in the trust due to the heavy premium that had built up. Iain Scouller, analyst at Stifel, slapped a 'sell' rating on the trust in July due to the premium, spurred by investor enthusiasm and buying from tracker funds as the trust entered the FTSE 250.
However, he has since moved to a 'hold' rating as the premium subsided, with the shares no trading at par to NAV, according to the latest figures from Numis Securities.
In a note issued in November, Scouller said he thought '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 initial public offerings or sales.'
The trust meanwhile retains a number of high profile fund manager backers. The largest fund shareholder, according to Reuters, is the £2.6 billion BlackRock Dynamic Diversified Growth fund, managed by Adam Ryan and Andy Warwick, which holds 2% of the trust's shares.
Ruffer is another big backer, with a stake worth £9.1 million held by the Total Return fund run by David Ballance and Steve Russell, and one worth around £810,000 held by the European fund run by Citywire A-rated Timothy Youngman, according to the funds' annual report for the year to 15 September.
A smaller holding, worth around £400,000 is held by M&G Fund of Investment Trust Shares , according to the fund's annual report, issued last year.
'The UK excels in life sciences and has a strong academic reputation but many products are subsequently commercialised outside the UK because of a lack of long-term capital investment at home,' said manager Richard O'Connor in the report.
'The trust's highly experienced fund manager seeks to address this use by investing in carefully chosen businesses, with the aim of helping them to fulfil their potential.'
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- CF Woodford Equity Income C Inc
- Sentinel Defensive Portfolio A Acc
- CF Seneca Diversified Growth Fund A Class
- Blackrock Dynamic Diversified Growth A Acc
- CF Ruffer Total Return O Inc
- CF Ruffer European O Acc
- Jupiter Merlin Real Return I GBP Acc HSC
- M&G Fund of Investment Trust Shares A Inc
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- Neil Woodford
- Paul Smith
- Adam Ryan
- Andrew Warwick
- David Ballance
- Steve Russell
- Timothy Youngman
- Algy Smith-Maxwell
- Richard O'Connor
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