Woodford reveals fee structure on new trust

Woodford stock market graph with coins

Woodford Investment Management has released further details of the 'innovative' fee structure of its new vehicle, the Woodford Patient Capital Trust.

The trust, headed up by star manager Neil Woodford, will not levy an annual management fee, but instead charge an annual performance fee of 15 per cent of any excess returns over 10 per cent - its target cumulative annual return.

The firm says this is 'subject to a high watermark', which generally means that each time the performance fee is levied the trust's net asset value must be higher than it was the last time a fee was charged.

The firm announced the launch of Woodford Patient Capital in early February, stating that the trust would seek to invest in early stage and unquoted companies mainly in the UK. The launch is planned for April following an initial offer period targeting funds of £200 million.

INTERESTING SECTOR

The sector has been of keen interest to Neil Woodford for over 10 years, during which time he has included a 'small tail' of such companies in his multi-billion pound Invesco Perpetual income funds and latterly in his firm's flagship fund, CF Woodford Equity Income.

At the launch announcement Craig Newman, chief executive of Woodford Investment Management, described the fee structure as 'innovative'. He added that very few other investment houses were attempting to align investor and manager interests as, he believes, the charging structure of Woodford Patient Capital will.

The firm had planned to release further details upon the publication of the trust's prospectus on 24 February; however it moved to clarify its charging structure on Wednesday following the publication of a note sent to professional investors from the trust's broker, Winterflood Securities.

Commenting on the firm's plans, Newman underlines his assertion that the charging structure of Woodford Patient Capital will fully align investor and manager interests: 'Critics of performance fees in the past have pointed to conservative benchmarks that could mean a manager is rewarded even when a fund delivers negative returns.

'We won't take this easy route. We will only receive a fee when the investment trust delivers what we believe is a challenging return, with a high watermark included. The investment trust will not be levied an annual management fee and so this removes any notion of effectively double charging. We won't be rewarded if we underperform.'

He also confirms that the firm would take the majority of its fee (80 per cent) in shares in Woodford Patient Capital Trust, with a 20 per cent cash consideration that would contribute toward any tax liability incurred through payment of the performance fee.

LONG-TERM COMMITMENT

Tim Cockerill, investment director of wealth manager Rowan Dartington, is supportive of the structure, adding that he hopes it will ensure long-term commitment from Woodford Investment Management:

'I do think it works because it aligns investors and manager rewards especially in a fund that is higher risk. The fund has to achieve 10 per cent before the fee kicks in, which is quite high and there is a high watermark too.

'Payment in shares rather than cash also aligns interest. The question is whether the managers too will be long-term shareholders once they have generated a fee and been paid in shares, let’s hope so,' he says.

Monica Tepes, investment trust analyst at Cantor Fitzgerald, adds that in the long term, the fee structure should prove 'advantageous' to investors.

'Given the high level of the hurdle (10 per cent compound), the lack of the management fee and the inception of the fund at a time where the UK equity market is at all-time high levels (while the performance fee has a high watermark provision), I think the fee structure is very compelling.

'Some may question the fee structure at times if, let's say, the market is up 25 per cent and the fund is up 15 per cent and a performance fee is payable while the fund underperformed the market. However, in my opinion, for the "patient" investor targeted by the fund, it is quite likely that the charging structure will prove advantageous over the longer term,' she argues.


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Comments

I'm less than convinced about

I'm less than convinced about this fee structure. How does one know that 10% is a sufficient hurdle given the nature of the risk profile of the investments to be made? How will fees paid on unrealised profits eventually pan out longer term should the fee be payable in a bubble valuation period while the actual investments are sold in a more benign period, or worst post crash.

There is also an exponential drag on performance over time should this fund return in excess of 10% with the damage to investors long term returns being larger as the outperformance increases. Compare that to a fund charging a 1.5% fee and you will see how this discrepancy over time reduces returns markedly. Taking the fee in stock, by increasing shares in issue, is another problem as the fee is not only paid once but earns a return over the funds life, at the expense of others investors, just like share options.

While many may say that there is no problem with giving a manager a fee based performance incentive, all the historical evidence shows that over time this always favours the manager. Too few investors understand risk adjusted returns well enough, and I suspect that Woodford, probably without intention to do so, is taking advantage of this lack of knowledge from investors.

In my humble opinion while this fee structure may appear innovative and refreshing it's actually the opposite, and will in time show itself as a unique enrichment scheme for Woodford and co at the expense of other investors.

I've been a big Woodford fan to date, with a slight hesitation about his previous comments on performance fees. This fund structure though is for me a no-go, and I suspect not adequately thought through.

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