Investment trust bargain hunter: Woodford Patient Capital heads for record discount

When the Woodford Patient Capital (WPCT) trust was gearing up to launch, investors were told not to expect fireworks straightaway – which is why, two years of subdued performance later, there is no need to panic.

The trust, managed by respected investor Neil Woodford, launched to much fanfare two years ago, sending WPCT instantly onto a hefty premium which peaked at around 15 per cent in August 2015.

Performance, however, has so far disappointed, something that Woodford acknowledged last month.

As a consequence the trust has slipped to one of the widest discounts since it launched, at 7.2 per cent, according to Winterflood, the investment trust broker. This is a whisker away from its record discount level of 7.7 per cent.

Nine months ago WPCT was trading at par, but since then it has seen its discount steadily widen out. This is a reflection of lower demand for the shares, due to performance underwhelming, particularly in 2016.

For bargain hunters WPCT has become more interesting, however, particular those who decided against putting money into the trust when it launched in April 2015.

It is not only the discount that catches the eye. Given that one of the rules of successful investing is to ‘buy low’ and ‘sell high’, investors will not only be buying the trust on the cheap (as the share price has fallen 10 per cent since launch), but they will also be buying low in terms of performance: WPCT’s net asset value is flat since making its stock market debut.

In the event of performance picking up, investors who buy today will therefore in theory benefit twice: from an improved net asset value and a narrowing of the discount.

The majority of brokers that backed WPCT ahead of its launch are keeping the faith, including stockbroker Killik. ‘We remain positive on the strategy offering exposure to a basket of innovative early-stage and early-growth businesses for investors able to take a long-term view,’ the firm said in a note to clients.

But others are less supportive. Stockbroker Stifel says its recommendation is ‘no better than hold’ despite the attractive discount on offer. The firm cautions that it may pay to wait, arguing the discount could widen out to in excess of 10 per cent.

‘We think that in a “stock market correction” scenario, this portfolio is unlikely to be defensive and if some investors do throw in the towel, the discount could widen out to double-digits,’ the firm said.

Investment Trust Bargain Hunter’s verdict

For those who missed out on picking up shares the first time around, the discount is one of the cheapest entry points there has ever been. As Stifel notes the discount could become even juicer, but regardless of whether it goes higher or lower investors need to take into account the long-term strategy of the trust, which invests in early-stage and unquoted companies mainly in the UK.

Woodford thinks there is plenty of money to be made in this part of the market, an area that the majority of other fund managers avoid venturing into. He targeted returns of 10 per cent plus when the trust launched, and backed this conviction by putting in place a ‘no win, no fee’ charging structure.

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