Forced selling by former star manager Neil Woodford has created some investment trust bargains, writes Nick Sudbury.
Neil Woodford has sold almost £1 billion of investments from his suspended Woodford Equity Income fund and reinvested the proceeds into FTSE 100 stocks, in line with his promise to make the fund more liquid (and to be ready to meet the expected wave of client withdrawals when it re-opens in December).
Most of the attention has focused on the unquoted holdings that have been the source of all the controversy, yet the disposals have included several investment trusts that are now available at wider discounts because of the size of the transactions and the forced nature of the sales.
Initially when it first launched, Woodford disclosed all of the holdings in his Equity Income fund, but as things deteriorated he became less willing to show his hand. Fortunately, it is still possible to piece some of it together if you take the interim accounts for the six months to the end of June as your starting point.
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These show that on 30 June he held just over 29m shares in NewRiver REIT (LON:NRR) that were worth £52m and that during the first half of the year he had already realised almost £83m from sales of the company’s shares. At one stage Woodford owned 22 percent of the issued share capital, but in the last few months this has been reduced to less than five percent (possibly zero).
I recently wrote that NewRiver REIT could be one of the biggest Brexit bargains around, partly as a result of Woodford’s massive offloading of shares into an already weak market. The company is currently yielding 12.5% and trading on a 34% discount to the latest published NAV of £2.61 per share.
Another casualty is the £182m Crystal Amber fund (LON:CRS), which invests in a concentrated portfolio of undervalued small-cap UK stocks, with the managers taking an activist approach towards their holdings. Much like NewRiver, this is an out-of-favour area where Woodford’s intervention looks like it could have artificially depressed the share price below where it should be.
At the end of June Woodford held 16.3m shares of CRS valued at £33.6m, but on 18 July it was reported that he had reduced his position from a 15.97% stake to less than five percent (possibly zero). The discount on the investment company had already been increasing because of fears over Brexit, but it now stands at 17% compared to a 12-month average of 8.8%.
Woodford has also dabbled with the peer-to-peer investment trust sector and may have created a buying opportunity, most notably in respect of VPC Speciality Lending Investments (LON:VSL).
During the six months to the end of June Woodford sold his entire holding in the £256m fund for just under £47.5m. This followed a tough period for the investment company during which it switched to lending to P2P platforms rather than individual investors.
The sale by Woodford and the demotion from the FTSE All-Share index due to illiquidity in the stock has created a possible value opportunity, especially as it is now delivering more consistent returns. At 79p the shares are trading on a 15% discount to the latest published NAV of 93.19p and the quarterly dividends of two pence per share give it a prospective yield of ten percent.
One other peer-to-peer fund to watch is P2P Global Investments (LON:P2P). Woodford sold his full holding in the £620m vehicle for £80m in the six months to the end of June, but it looks like he still has a significant stake in the Honeycomb Investment Trust (LON:HONY), which is run by the same management company, Pollen Street Capital.
Pollen Street has worked hard to turn around the portfolio and performance of P2P since taking over its former manager, yet the fund still trades on a 13% discount, whereas Honeycomb’s superior performance has left it on an eight percent premium.
There had been speculation that the two could merge, which would probably have resulted in a positive re-rating of the P2P shares, but Woodford’s large holding in Honeycomb’s rarely traded stock makes this difficult unless there is some kind of deal. Adventurous investors might want to take a punt on P2P ahead of a possible merger or they could short HONY in anticipation of Woodford having to dump his 18% stake into a thin market.
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