Following a trip to the AGM, Richard Beddard outlines the investment case for Woodford Patient Capital trust.
Whichever way you look at it, the case for investing in Woodford Patient Capital (WPCT) is all about reputation.
Brand names and logos originally served to identify products, but over time brands have come to encompass our perception of a product, and all the good, or bad things we associate with it. Sometimes a firm's reputation is synonymous with its products and its brand.
I was thinking about the power of brands at the Woodford Patient Capital Trust Annual General Meeting on Monday. Patient Capital is, I think, an investment company that depends on the reputation of its fund manager, Woodford Investment Management, which in most people's minds is inseparable from the reputation of its head of investment, Neil Woodford. Woodford had a long and impressive record at Invesco Perpetual before setting up his own firm in 2014.
In my mind, Woodford's chiselled face embodies craggy Ama Dablam, the Nepalese mountain also known as the Matterhorn of the Himalayas, adopted 30 years ago by Invesco Perpetual as its logo.
Meeting brand Woodford
Woodford Investment Management goes out of its way to involve shareholders, blogging, and disclosing all the holdings in its funds. Patient Capital's AGM has been organised to invite discussion too. It's in Oxford's Museum of Modern Art, which is imposing on the outside, but convivial on the inside. Woodford and chairman Susan Searle sit on a softly lit raised platform surrounded by sofas full of shareholders.
He gives a presentation reminding us the trust aims to make good a deficiency in the funding of scientific start-ups in the UK, which prevents them reaching their potential. By investing, the trust will help create global multi-billion pound businesses, which will be good for shareholders, and good for the economy, especially as the economy's prior engine for growth, financial services, is a busted flush (I'm paraphrasing).
Despite the performance of the trust, its share price and Net Asset Value (NAV) have declined modestly since it was launched in 2015, Woodford reassures us it's still way ahead of where he expected it would be after two years. The quality of the businesses, science and people it has invested in, and also the quality of its network, the academics and the universities spawning start-ups and like-minded investors funding them, have surprised him.
He takes questions from the sofas, and, with some of his fund managers and the trust's directors, he mingles with shareholders afterwards.
I think exposure to brand Woodford is fundamental to the trust's strategy. Providing long-term capital to small, and sometimes unprofitable and unquoted businesses will result in setbacks and giant leaps forward. The annual report documents a setback, Circassia (CIR), which has written off its research into vaccines against animal allergies. It's share price has declined by more than two-thirds.
Purplebricks (PURP) shows the potential for holdings to grow quickly, though. Woodford first invested when the online estate agent, then unlisted, was valued at £6 million. Today its market capitalisation is over £1 billion.
With short sellers interested in up to 25 per cent of the share capital of listed holdings like Allied Minds (ALM) and Prothena (PRTA), there's a propaganda war being fought between those who would benefit from a decline in the share price and those who trust in their interpretation of the long-term fundamentals. Woodford is patient, he operates on a three to five-year time frame, and is more confident than ever the trust will meet its 10 per cent annual growth target, but shareholders must share his confidence if they are to stick with the trust.
No win, no fee
According to the trust's innovative fee structure, Woodford Investment Management will not be paid for its work until it achieves the target. Although Woodford thinks the hurdle is lowering as the fundamentals improve, in mathematical terms the hurdle is higher after two years because the target increases by 10 per cent every year, and ground must also be recovered due to the fall in NAV. Could the fund manager lose patience? How long is the firm prepared to work for free?
Woodford himself is a shareholder, he voted at the meeting like the rest of us, but the size of his holding isn't disclosed. It doesn't have to be because it's not greater than 3 per cent of the equity in the company. A notifiable holding would be worth in excess of £23 million today so we can be sure Woodford's is worth between 92p, the price of one share, and £23 million! I'm assured it's big, growing, and may be notifiable one day.
Apart from skin in the game, the glue that binds the fund management company to Patient Capital is a contract that can be terminated at three months' notice and Woodford's reputation.
Woodford's reputation doesn't just give me confidence, I believe it gives other investors confidence too, and that confidence means the trust is more likely to succeed. Patient shareholders allow Woodford to put money to work for the long-term.
That's one dimension of competitive advantage. There are others. Brand Woodford's reputation surely encourages start-ups to seek funding from Patient Capital, because its patient and an investment is tantamount to an endorsement.
The revelation that Woodford collaborates with like-minded investors surprises me. I'd imagined the dearth of investment, the opportunity Woodford spotted, would intensify as Britain leaves the EU and, in my binary way, I'd assumed pools of capital compete to invest in the same companies.
Both assumptions are wrong, or at least the situation is more nuanced. Perhaps because Woodford has drawn attention to the opportunity, foreign funds are increasingly disposed to invest. The trust has invested all its money, and probably needs to increase its NAV before it raises more, but companies still require funding, so Woodford is collaborating to keep the science niche growing, enhancing shareholder returns and, of course, Woodford's reputation.
- Neil Woodford: why my performance in 2016 was disappointing
Reputation, reputation, reputation
Reading this homage, you may be thinking I've swallowed Patient Capital's PR handbook, but I've done something potentially more rewarding and dangerous. I've joined a few stray dots myself. Reputations can be destroyed, so you have to believe Woodford's brand will endure to buy any of this, but I think the bigger the brand, the less likely it is to fall. Strong brands reinforce themselves.
Conflicts of interest and high fees make it difficult for fund managers to beat the market over their careers. For that reason, and because I prefer to pick my own shares, I've only ever invested in four funds: two investment trusts and two open ended funds. They are, or were at the time of my investment, managed by fund managers whose reputations transcend the self-destructive mechanics that weigh on lesser funds.
Two of the funds are managed by Fundsmith, which is Terry Smith's investment company. Smith's reputation in fund management is shorter than Woodford's, but his reputation as an investment analyst and businessman is extraordinary.
His funds allow me to profit from markets I don't understand well or even have access to, super-massive multinationals and companies traded on exchanges far away. Woodford Patient Capital serves a similar purpose. It enables me to invest in unlisted and young listed firms whose science and valuations I can often barely comprehend.
My first investment, to pay off the interest only mortgage on my first house, was an investment in the Invesco Perpetual High Income fund, previously run by Woodford. With hindsight, I wish that investment had been perpetual.
This article was originally published on our sister website Interactive Investor.
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