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Trust Insider: looking beyond the Woodford Patient Capital hype

Trust Insider: looking beyond the Woodford Patient Capital hype

I promised to write something about Woodford Patient Capital (WPCT) once it published more information on its portfolio. It has just put out its interim accounts, which cover the period from launch until the end of June 2015.

It has also published a full list of the investments in its portfolio and says the intention is to publish the whole portfolio each month from now on, which is a stance a number of funds are now adopting and one I think should be commended.

It is obviously early days in the life of this fund but performance to date has been OK. As WPCT points out, it has managed to make enough money to cover the expenses of launching and make investors a little bit too.

This result is somewhat obscured by the big premium the fund’s shares are trading on. I was pleased to see the board seems to share my concerns that this is excessive – warning of the long-term nature of the trust’s investments, for instance – and has plans to issue shares to help bring the premium under control.

WPCT reckons it is in a position to do this now as more than three quarters of the proceeds of the original issue have been invested. About a quarter of the portfolio is in mid and large cap stocks, a quarter is in cash and the balance is invested in smaller, more immature investments, some of which are unquoted. They break this part of the portfolio down into a target of one third ‘early growth’ companies and two thirds ‘early stage’. The message is all about exploiting intellectual property.

Many investment managers say that they look for companies with defensible market positions, which often includes companies having patent rights over their products, but WPCT is one of a new breed of funds where this is the principal focus. The trouble for the competition is that WPCT is by far the largest of these and it remains to be seen whether any of the others will be able to attract meaningful amounts of capital.

The other new intellectual property funds are Duke Royalty (until recently Praetorian Resources), Kuala Innovations (formerly China Growth Opportunities) and Adams (formerly Carpathian – a property company investing in Eastern Europe). Duke has just over £5 million of assets, most still invested in small resources companies. Kuala and Adams are even smaller.

All three need to raise extra money if they are to make a go of the new strategy (even combining forces wouldn’t be enough).

Returning to WPCT, most of its investments will be in UK companies. I’m all in favour of this, there is an obvious dearth of funding available to UK businesses with good ideas that need a bit more investment to get them to market. Anything WPCT can do to help address this is welcome.

WPCT has a stake in Imperial Innovations, a listed play on exploiting some of the good science coming out of UK universities. It also has an investment in a similar vehicle, the unlisted Oxford Sciences Innovation, which I think could turn out to be a great call.

As I pointed out a couple of months ago, there are alternative funds around, such as River & Mercantile UK Micro Cap and Miton UK MicroCap, if you want to get access to small and innovative UK companies and the Miton fund has been raising money recently.

These funds aren’t investing in unquoted investments however. Most of the ‘venture’ money around seems to come from venture capital trusts and enterprise investment schemes (which makes sense, given the sizeable tax breaks those funds attract).

WPCT’s unquoted investments look pretty interesting. Most are biotech companies but one that caught my eye was Industrial Heat, a company that is trying to make money from low energy nuclear reactions (aka cold fusion). If it can pull this off it should be worth a fortune, but I’m guessing there will be plenty of sceptics out there.

Industrial Heat is one of WPCT’s unquoted US investments. The US venture capital market has been really strong for a while now but UK investors haven’t really been able to access a listed vehicle to play this theme.

Private Equity Investor is probably the closest thing to a US venture capital fund but it is in wind-down mode and has no plans to resume investing. WPCT has powers to invest up to 30% of its assets in markets outside the UK. At the end of June it had 12% of its portfolio in the US but only 2.8% of the portfolio is in US unquoteds – the other 11.7% in unquoteds is all invested in UK companies. WPCT probably doesn’t fill this particular gap in the closed-end fund market at the moment.

A big chunk of the portfolio, 46.7%, is invested in healthcare. Here there is a lot more competition in the form of Orbimed’s Worldwide Healthcare and Biotech Growth Trusts, International Biotech, Polar Capital’s fund and a couple of Swiss-listed funds, BB Biotech and HBM Healthcare.

The sector has had a phenomenal run in recent years. Biotech Growth Trust’s net asset value (NAV) and share price have more than quadrupled over the past five years. WPCT’s half-year report does acknowledge this, saying several US biotech stocks are trading on bubble-like valuations. However it believes that the companies it has invested in are good value.

I find it hard to see what could trigger a reversal of the healthcare sector’s fortunes at the moment. A brief wobble earlier this year seems to have been shrugged off. Most of the listed competition doesn’t have much exposure to unquoted companies.

One exception is International Biotech, which has had a mixed record with its investments in this area. I am not sure if I would choose to get access to the sector through WPCT as opposed to a pure play fund.

WPCT has clearly caught the imagination of many investors but over the coming year or two it will move beyond the hype and have to start generating decent performance. I would not buy it on this premium but I do think it has a useful role to play in the investment companies market.

James Carthew is a director of Marten & Co

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