Almost 10% of Neil Woodford’s £9 billion Invesco Perpetual Income fund is held in stocks where he owns more than 28% of the company, just under the threshold where he would have to make a bid for the firms as stipulated by takeover rules.
He also owns more than 50% of certain small caps and has higher than 20% stakes in 33 companies, positions which amount to 15.5% of the fund.
William Deer, product director in the firm’s UK equities team, said the contribution to performance from the fund’s small and unquoted firms has been ‘meaningful’.
However, these stakes amount to a sizeable portion of the respective companies, and the City Code on Takeovers says if an investor acquires more than 30% of a company, they have to make a bid for it.
Deer says Woodford owns just under 30% in certain smaller companies, meaning the Takeover Code is not relevant in these cases, but 1.68% of the Income fund is invested in companies in which Woodford has more than 30%.
‘If you want to own more, then you can get a “whitewash” agreement with the other shareholders, saying you’re not going to take over the company,’ said Deer.
Stocks in which Woodford owns more than 30% of the company include litigation investor Burford Capital at 39% and E-Therapeutics, in which he has a 47% stake, amounting to nine basis points of the fund.
He also owns 56% of Phytopharm, a medicinal plant farm, and 50% of Raven Russia, a property investment company.
Deer said the team will do ‘everything [it] can not to bid’ for a firm, although there are certain scenarios where Woodford’s stake in a firm will exceed 30% or where this is not necessarily relevant to the Takeover Code.
For example, Deer said if a company in which Woodford has a 30% stake wants to raise equity, the manager would want to stand his corner and own more equity. Companies listed in certain jurisdictions also do not require a ‘whitewash’ agreement where an investor acquires more than 30%.
However, Woodford has a number of stocks amounting to 8.31% of his fund, where he owns more than 28% of the company, ‘at the limit of what we could own,’ said Deer.
Unquoted companies also provide an attractive growth opportunity with these firms that Woodford has held for a minimum of five years forming an average weight of 0.35% of the fund.
While the Income fund is up 24.6% over five years, these unquoted companies have returned 1.81%, delivering a ‘contribution [that] has been meaningful relative to their weight,’ said Deer.
The size of Woodford’s stake in some of these small companies is so large it would be tough for him to pull out.
‘Under what circumstances might we have to sell?’ said Deer. ‘We have the potential to sell, but it will be very difficult. Our expectations are to hold these for the long-term.’
He added these holdings are ‘part-paid’ structures and so if it looks like the story is progressing for these individual companies, Woodford will put more money to work.
There is, however, a different set of challenges with smaller companies in comparison to large caps, meaning the ‘path of exit will not be like Vodafone,' Deer said.
Although this can mean these positions are riskier, ultimately the manager has conviction and is backing the ‘smartest ideas’ that are also presented to them via IP Group.
‘Why do we have so many small holdings?’ said Deer. ‘They’re not all going to work, but we only need one or two and they can be a meaningful contributor to performance.’