Is Woodford Patient Capital a bargain buy? We look under the bonnet

Neil Woodford’s investment trust has divided opinion among investors a­fter suffering a spell of poor performance. But are the critics being too hard on it? We review the trust's prospects.

Neil Woodford is one of the best-known asset managers in the UK, having consistently delivered significant outperformance over more than 25 years in fund management. He has often been under intense media scrutiny, especially since leaving Invesco Perpetual in 2014 to set up Woodford Investment Management and launch the LF Woodford Equity Income fund.

He launched Woodford Patient Capital Trust (WPCT) investment trust in April 2015. To support its investors, the firm went a step further in terms of openness and transparency than its competitors by absorbing research costs and publishing all fund holdings on its website. WPCT has an innovative fee structure that aligns the management group’s interests with those of its shareholders.

Series of setbacks

While Woodford is better-known for running large-company, income-oriented funds, WPCT is a very different proposition. It focuses purely on disruptive early-stage and early-growth companies (mainly in the UK) that he believes have strong growth potential over the longer term.

Woodford’s high profile and popularity among retail investors helped WPCT raise in excess of £800 million from investors at launch, and initially it traded on a premium to net asset value (NAV) as high as 15 per cent.

However, despite this initial gain at the share price level, the trust has struggled relative to its peers in the AIC UK all companies sector and the FTSE All-Share index. From inception to the end of September, its shares lost 15.8 per cent of their value, compared with a gain of 23.2 per cent from the FTSE All Share index. It is currently trading at a discount to NAV of around 10 per cent.

As with the open-ended LF Woodford Equity Income fund, the trust’s performance has been severely hit by setbacks involving Northwest Biotherapeutics and Prothena, among others, combined with relatively poor sentiment towards UK smaller companies because of Brexit uncertainty. WPCT was ejected from the FTSE 250 index earlier this year, after a prolonged run of poor performance. However, while the trust’s performance has been disappointing, it should be remembered that every fund manager invests in stocks and strategies that can go through bad patches, and Woodford’s picks are no exception.

The investment case revisited

In January, Money Observer recommended the trust as our ‘wild card’ Rated Fund selection for 2018. The shares are currently little changed but have been volatile, so now is a good time to revisit the investment case.

Of course, investors must be patient and fully understand the risks that come with the Woodford approach and how WPCT is built and managed. This is a higher-risk strategy, as the manager invests in early-stage disruptive growth companies, takes high-conviction positions and holds them for the long term. As a result, the portfolio significantly differs from its peers in the sector and from the FTSE All-Share index, so its relative performance will diverge from the wider market.

This is a long-term investment opportunities strategy, so the manager’s performance should be judged on returns over at least three years. Woodford has been running this strategy for just over three years, so he still has some time on his side.

Moreover, he has a history of successfully navigating through poor periods when his views and chosen stocks were out of favour for an extended period – before the dotcom crash of 2000 and the global financial crisis of 2008, for example.

The trust is relatively diversified in terms of the number of holdings – 89 at the end of August – but very concentrated when it comes to individual positions, as the top 10 holdings account for 57 per cent of NAV. But this is not unusual for a Woodford portfolio.

The portfolio’s five largest holdings by value currently are: Benevolent AI (9.8 per cent), Autolus (8.4 per cent), Oxford Nanopore (8.3 per cent), Proton Partners (7.4 per cent) and Immunocore (5.5 per cent). The manager can allocate up to 20 per cent to any single stock, which makes minor setbacks in portfolio performance the norm over the short term.

A graph showing how Woodford trust has struggled badly relative to the FTSE All-Share Index


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