At the start of March it was announced that the Woodford Patient Capital Trust (LON:WPCT) would acquire a portfolio of unquoted assets from the Woodford Equity Income fund for £73m via the issue of new shares. The latter would also subscribe for additional new WPCT shares worth £6m in order to give the investment trust the cash it needs to meet the further investment requirements of its existing portfolio over the next 12 months.
Both funds are managed by Neil Woodford, who is the country’s best known fund manager, although things haven’t been going well since he set up his own firm in 2014. After the transfer, the UK Equity Income fund will hold 9% of WPCT and WPCT will account for 1.45% of the income fund.
Really struggled in the last 18 months
|Master Investor Magazine
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Woodford’s flagship Equity Income fundhad a successful first couple of years during which it comfortably outperformed its peer group, but has really struggled in the last 18 months. The poor performance and large volume of client redemptions has seen the assets under management fall from more than £10bn to less than £5bn and this has led to investors demanding that the fund increase its exposure to more liquid assets at the expense of some of its unquoted holdings.
WPCT was launched in April 2015 to provide long-term capital growth by investing in both quoted and unquoted UK shares, but it has struggled with the shares around 18% lower than the issue price and trading on a 13% discount to NAV.
The portfolio that was transferred between the two funds consisted of five unquoted companies − Atom Bank, Carrick Therapeutics, Cell Medica, RateSetter and Spin Memory – that were already well represented in WPCT, with the move boosting the total weighting from 7.2% to 14.1%. This was one of the main reasons that they were chosen, along with the fact that there are no imminent milestones that could trigger a valuation change in any of them.
Willis Owen has criticised the fact that it doesn’t make sense for Equity Income investors to hold 10% of an investment trust that doesn’t pay dividends and that has a revenue account deficit, although the unquoted holdings are mainly there to generate excess capital returns from disruptive technologies.
A positive re-rating of the investment trust’s shares
Winterflood has suggested that the support of the Equity Income fund could lead to a positive re-rating of the investment trust’s shares, especially as it could take advantage of the discount by buying additional shares via the stock market. They also thought that it would be helpful for the open-ended fund as it would be a more liquid way of gaining exposure to the same sort of early stage, unquoted companies.
A research note from Stifel, however, says that the move appears to be more beneficial for Woodford Equity Income than WPCT, although the fact that the new shares were issued at NAV, which was 13% higher than the share price, would result in an immediate £9.5m paper loss for investors in the Equity Income fund.
Analysts at JP Morgan have taken the opposite view and said that they would be surprised if the income fund investors would be happy with the dilution they face on their WPCT investment. This is because the new shares were issued at NAV – which is higher than the share price – to avoid diluting the holdings of the existing shareholders.
The simple truth of the matter is that Woodford has taken a series of big bets on illiquid unquoted companies in both products and they haven’t paid off yet, with dissatisfied investors forcing him to take a hit in the Equity Income fund to increase its liquidity. His legion of followers may see this as a pragmatic solution that could give him the time he needs to turn things around, but investors are fickle and he needs to start delivering otherwise the exodus could turn into a dangerous rout.