Fund Profile

Woodford Patient Capital Trust 09 September 2019

Disclaimer

Disclosure – Non-substantive Research

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour. 

Overview
We see few reasons for the currently very wide discount to narrow any time soon...
Overview

Woodford Patient Capital (WPCT) has a concentrated portfolio of early-stage unquoted and quoted companies, focused on technology and healthcare, with high return potential and high levels of stock-specific risk. It is managed by Neil Woodford, one of the most high-profile fund managers in the country. The trust does not pay a dividend.

Neil focuses on picking businesses that he believes have the chance to be successful through the use of new technologies and in whose management teams he has faith. The trust is a pure stock-picking play, with the manager paying no heed to sector or geographic concentration. The drivers of the companies should be secular developments in their fields, and fundamentally global in scope.

The portfolio has become highly concentrated, although position weightings are no longer being published since the open-ended Woodford Equity Income fund has been gated. Most of the portfolio is now in unquoted companies.

Since launch in 2015, the NAV total return performance has been disappointing, with the trust losing 20%, while the FTSE All Share has returned 22.5% over the same period. Since June 2019, WPCT has been affected by the issues in the wider Woodford Investment Management (WIM) business that have led it to fall onto a discount of 45%. One of the fears is that the manager may have to sell unquoted stocks in the open-ended fund which are also held in WPCT, and if he is seen as a forced seller or if this is a disadvantageous time in the development of the companies, this could lead to mark downs to the trust’s NAV.

We note that one potentially attractive feature for investors is that WPCT has no annual management fee. Although there is a performance fee, it won’t be payable until the NAV reaches 146p – an almost 50% uplift to its current level. This means that investors will only pay the 0.18% ongoing charges until that mark has been passed. The possibility of a change of manager has been discussed by the board, and so it is worth noting that these advantageous fee arrangements might not be retained should a new manager be appointed.

Kepler View

It is hard to see sentiment towards the trust returning until the situation in the Woodford IM business is resolved. While the possibility remains that the open-ended Woodford Equity Income fund would have to sell its stakes in WPCT holdings at a poor price, the discount is likely to remain wide, in our view. A change of management, mooted in the press, would not necessarily change this dynamic, and indeed might reduce the disincentive for the manager of the open-ended fund to sell the holdings at any price.

As for the portfolio, there are some companies that show promise – we would highlight Oxford Nanopore, Atom Bank and Autolus in particular. However, other significant positions seem to be struggling, and in general those with promise still seem to have a long way to go to realise this potential.

BULL
BEAR
Neil Woodford has an outstanding long-term record
Possible overhang of stock to be sold from the open-ended Woodford funds
The trust trades on a 44% discount
The trust is concentrated, and some major holdings may fail – in part because of the troubles at Woodford Investment Management
The fee structure is highly favourable for investors at current NAV
It will likely take a resolution of the open-ended Woodford funds’ situation to see sentiment improve
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