Woodford Patient Capital Trust – Is it an Opportunity?

Neil Woodford’s problems at his Equity Income Fund which have caused the fund to close to redemptions have been filling up the pages of the financial press in the last few days. The fact that his reputation is now in tatters has spread like a contagion to others including to Hargreaves Lansdown (HL.) as they effectively recommended the fund (HL. share price is down 22% since May 16). It’s also affected the share prices of holdings in the fund portfolio as investors anticipate that he will have to dump some of his holdings in a fire sale to meet redemptions when the fund reopens.

Another company that has suffered is Woodford Patient Capital Trust (WPCT) which is an investment trust managed by the Woodford firm. It’s down 29% since mid-May and now trades at a discount to net asset value of 27% according to the AIC. That’s quite unusual for any investment trust who can typically control the discount by share buy-backs and other means. The shares are even being shorted by speculators according to a report in the FT which is again unusual for an investment trust. Is this a speculative buying opportunity I wondered? So I took a quick look at the company, and have read the last Annual Report (to December 2018).

This is an unusual trust in many ways. The company has an objective to deliver “a return in excess of 10 per cent per annum over the longer term”. That statement is a hostage to fortune if I ever saw one. It achieved a 6.9% increase in NAV last year, but is down over the last 3 years overall.

It has a peculiar management fee with a low base cost of 0.2% but a performance fee where the manager gets 15% of any excess returns over a 10% cumulative hurdle rate per annum, subject to a high watermark. That’s the kind of management fee that would put me off investing normally.

This is an interesting summary of the trust in the Annual Report: “WPCT has a unique portfolio of companies, developed over a long period, where the Portfolio Manager has a deep insight into the evolution of the businesses. Many of these companies are now in the commercialisation phase. For example, Proton Partners, the UK’s first high-energy proton beam therapy provider, treated 25 patients in its Cancer Centre in Newport last year and opened two further centres in Northumberland and Reading. Autolus successfully listed on NASDAQ and its CAR-T cell technology is in a strong position to drive advances in the battle against cancer. Meanwhile, one of the Company’s largest holdings, Industrial Heat, raised capital from external investors having shown positive progress and it is anticipating reaching a key milestone in the year ahead. Companies within the portfolio are also attracting high-calibre individuals, typified by the senior appointments at Immunocore.”

The trust consists of a portfolio of smaller companies, mainly unlisted but with some listed with a heavy emphasis on healthcare, financials and technology. The largest holdings given on the latest data sheet are Benevolent AI, Oxford Nanopore, Autolus, Atom Bank, Proton Partners, Industrial Heat, Immunocore A, Oxford Sciences Innovation, Industrial Heat A1 Pref and Mission Therapeutics. You only have to look at a few of these to realise that even where listed, the valuations might be problematic, and for unlisted ones that’s even more so. These are early stage companies in most cases.

It’s rather like a VCT portfolio except with even bigger bets on the longer-term prospects of the companies. Lots of comments about positive prospects, increasing promise and making operational milestones in the reviews in the Annual Report but little mention of profits. Page 19 tells you that 65% of the portfolio is unquoted, with 80% classed as “early stage” companies. The trust also employs gearing of up to 20%.

The Board of Directors looks experienced but they are also the typical “great and good” of the investment world, including one Dame, with lots of jobs – too many perhaps.

The trust issued a reassuring statement for investors yesterday. It said “The Board is pleased with the operational progress of its portfolio companies, which the Board believes continue to have the potential to deliver attractive returns, in line with the long-term mandate of the Company. The operational performance of these businesses is not impacted by recent events”. But it acknowledged the impact of events at the Woodford Equity Income Fund and on the share prices of investee companies.

I could spend days analysing the companies in the trust’s portfolio to see whether the valuations made any sense, and still be not much wiser about their real prospects. I am not sure it’s worth the effort. Does the trust have enough cash to undertake any large tender offer or share buy-back is probably more relevant and also meet the needs for more investment typically required by early stage companies? I doubt it.

Regrettably I think the name of Woodford on the trust could cause it to continue to trade at a deep discount even though there is clearly a team of people running the portfolio. It is never a good idea for a fund or trust to name themselves after the fund manager or his company, even if that was a major selling point when first launched.

Trust shares are always tradeable, at least unless a company asks for its shares to be suspended because of doubts about its finances. But the share price discount is driven by investor sentiment and I don’t think the view of this company among investors is going to be very positive for some time.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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