The £757m Woodford Patient Capital Trust (LON:WPCT) has recently announced its annual results for the year ended 31 December 2016. These show that it was a disappointing year for investors in the fund with the NAV falling 4.2% and the share price losing almost 10%.
WPCT was launched in April 2015 with the aim of achieving long-term capital growth via a portfolio of mainly UK companies, both quoted and unquoted. Its objective is to deliver a return in excess of 10% per annum over the longer term, although to-date it has fallen well short of this ambitious target.
These high returns would come from hitherto untapped growth opportunities. Despite having some of the best universities and finest intellectual property, the UK’s record of converting this into commercial success is poor. It is thought that this is mainly due to a lack of appropriate capital investment.
Neil Woodford strongly believes that the long-term ‘patient capital’ approach espoused by the fund has the potential to deliver extremely successful outcomes and help businesses fulfil their potential, while also helping to develop the UK’s ‘knowledge economy’ and support the much-needed economic rebalancing.
Woodford is one of the country’s top fund managers and made his reputation at Invesco Perpetual where he ran £15bn of assets, before setting up his own investment management business in 2014.
WPCT provides exposure to a portfolio of disruptive early-stage and early-growth companies alongside some of Woodford’s high conviction mid and large cap ideas. Unfortunately the latest estimated NAV of 95p represents a loss of 5% on the issue price and the shares after trading at an initial premium have fallen to a 3.8% discount.
Writing in the accounts, Woodford said that “the operational progress made during the year, across the majority of the portfolio, was extremely encouraging” but that “much of this fundamental progress has yet to be reflected in the NAV”. He also made the point that several of the holdings were on the verge of delivering their commercial potential.
Early-growth companies normally either succeed spectacularly or fail completely. If Woodford can identify enough winners he could make a really good return, but it is a long-term process that might only deliver mediocre performance until they start to come through.
Neil Woodford strongly believes that the long-term ‘patient capital’ approach espoused by the fund has the potential to deliver extremely successful outcomes.
Unquoted investments currently make up 42% of the portfolio and last year they added a positive contribution of 2% to the overall return. This was more than offset by a 5% negative contribution from the portfolio’s quoted holdings.
Last year’s most successful performer was Theravance Biopharma, a US-listed biotech stock that rose 155% after the release of positive clinical data. This added 2.63% to the fund’s performance and was closely followed by the 1.94% contribution from Prothena, which develops therapies aimed at disease-causing proteins and is the biggest weighting at 16.3% of the fund. The online estate agent Purplebricks was also in positive territory and is the second biggest holding accounting for 7.7% of the assets.
At the other end of the scale there were several companies that detracted from the overall performance with the most notable example being Circassia. The disappointing results from a late-stage trial into its cat allergy vaccine that was announced in June led to a 70% fall in its share price over the year and a negative contribution to the fund of 3.55%.
Amongst the new holdings added in 2016 were Thin Film Electronics, a Norwegian company that specialises in printed electronics, and Draper Esprit, a venture capital investment company that is focused on high-growth technology businesses. There were also new unquoted positions in Metalysis, a company that serves the 3D printing industry, and Nexeon, a battery technology business.
At the end of February, 58% of the portfolio was invested in quoted shares with the balance in unquoted companies. Most of the exposure (72.3%) was in the UK, with the next biggest weighting being the US at 22%. As with Woodford’s other funds there was a strong bias in favour of Biotech and Healthcare that made up 59% of the assets. In total there were 73 holdings with just 21% of the portfolio invested in large and mid-cap stocks.
As you would expect, the current mandate contains a number of investment restrictions. These include: a maximum exposure to unquoted holdings of 60%, the non-UK weighting capped at 30%, and no individual position to exceed 15%, with all calculations based on the percentage of net assets at the time of investment.
The Board is seeking shareholder approval to change these conditions to provide ‘greater flexibility to capture growth and follow-on investment opportunities’. If the investors agree, the limit on the unquoted holdings would be increased to 80%, the overseas cap would be removed altogether and the maximum single company exposure upped to 20%.
WPCT is completely different from any other investment trust and has an extremely attractive fee structure.
Under the current rules the portfolio has to be invested in at least 40 stocks – the expected range is 50 to 100 – and the maximum gearing is limited to 20%. It is also worth noting the highly competitive fee structure. The fund has a unique arrangement with no annual management fee, with the only remuneration consisting of a performance fee of 15% of any excess returns over a 10% per annum compound hurdle, subject to a high watermark.
No performance fees have been paid to date and the Broker Numis has estimated that the NAV would need to increase by 39% during the current financial year for a fee to be payable in 2017. This meant that last year the ongoing charges (based on the other costs borne by the fund) were just 0.17%, which is equivalent to what you would expect to pay for an index tracker.
WPCT is completely different from any other investment trust and has an extremely attractive fee structure, but the performance since inception has been poor with the shares down 9% on the issue price. If it had a less popular manager than Neil Woodford the shares would be trading on a much wider discount than the current 3.8%, although he really needs to turn things around quickly and start delivering for his investors.
Despite the lacklustre start Woodford remains positive on the operating performance of the fund and is strongly committed to the principle of backing early stage growth companies over the long term. His successful track record means that Woodford Patient Capital Trust is well worth keeping a close eye on.
The fund’s performance will largely be driven by the success or failure of the early stage companies in its portfolio, especially the larger positions like Prothena and Purplebricks. If you support the idea behind it and trust Woodford to pick the right stocks it could make a useful diversifying holding for your portfolio.