In this article, I pitch top fund manager Neil Woodford’s recently launched Woodford Patient Capital Trust (LSE: WPCT) against a possible alternative option in the shape of a mini-portfolio consisting of Allied Minds (LSE: ALM), IP Group (LSE: IPO) and Imperial Innovations Group (LSE:IVO).
What are the similarities and differences between the options? And which is likely to give you most bang for your buck?
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Woodford’s target weighting for his Patient Capital portfolio is: 25% mid/large quoted companies; 25% early-growth companies (typically quoted but may be unquoted); and 50% early-stage companies (quoted and unquoted). Woodford is very much seeking to exploit the same cutting-edge-technologies space that Allied Minds, IP Group and Imperial Innovations invest in, except that he includes mid/large cap exposure.
Woodford anticipates initially holding 50-100 companies; potentially more as the portfolio matures. Imperial, IP and Allied have stakes in 98, 90 and 20 companies, respectively (a combined 208).
Geographically, Woodford is targeting at least 70% invested in companies traded on the London Stock Exchange or incorporated in the UK. An equally-weighted Imperial, IP and Allied portfolio (let’s call it IIPA, for convenience) would have about 67% invested in UK companies, via Imperial and IP, and 33% in the US, via Allied.
So, there are a number of broad similarities between Patient Capital and IIPA, with IIPA’s lack of any large-cap exposure perhaps being the most marked difference. The table below shows the blended IIPA’s top 10 holdings
|Oxford Nanopore Technologies||Unquoted||IP||12%|
|Circassia Pharmaceuticals||Quoted (FTSE SmallCap)||Imperial||9%|
|Spin Transfer Technologies||Unquoted||Allied||8%|
|SciFluor Life Sciences||Unquoted||Allied||6%|
|hVIVO (previously Retroscreen Viology)||Quoted (FTSE AIM)||IP||3%|
The IIPA top holdings look a little scary against some of the familiar blue-chip names, such as AstraZeneca, that are likely to feature in Patient Capital’s top 10.
But how has the unconventional IIPA portfolio performed? The table below shows some compound annual growth rate (CAGR) numbers for IP and Imperial. (Allied joined the stock market less than a year ago, so isn’t included.)
|IP CAGR (%)||Imperial CAGR (%)|
|Last 3 years||12.4||13.5|
|Since 31/7/06 (Imperial flotation)||5.3||2.7|
|Since 15/10/03 (IP flotation)||12.0||n/a|
Now, what can we expect from Patient Capital. The trust’s investment objective is as follows:
“The Company will aim to deliver a return in excess of 10% per annum over the longer term. (Note: this is a target only and not a profit forecast and there can be no assurance that it will be met.)”
Woodford appears confident of success, though, because Patient Capital is charging no annual management fee. His remuneration will come in the form of performance fees, dependent on him beating the 10% per annum hurdle.
It seems Woodford believes he can do at least as well as that long-term 12% CAGR delivered by IP in the table above — and, what’s more, achieve it with 25% of his portfolio invested in less risky FTSE 100/FTSE 250 companies.
While Woodford is renowned for his blue-chip nous, investing in early-stage/early-growth companies isn’t unfamiliar to him. In fact, he actually holds Allied (4.1%), Imperial (1.3%) and IP (0.8%) in his mainstream Woodford Equity Income Fund.
Significantly, though, he has also put additional cash into a select few of the IIPA investee companies — presumably in the belief that his subset will out-perform the whole; otherwise, why bother? And the same goes for a number of other early-stage/early-growth companies he’s invested in that aren’t in the Allied, Imperial and IP portfolios.
Woodford will have some hard data on his stock-picking performance in this area of the market from past experience, and projections on what he might reasonably hope to achieve when combining this with a 25% weighting of his high-conviction large-cap picks.
As such, on balance, I tend to think that Woodford’s Patient Capital could offer a better risk-reward profile than the alternative IIPA portfolio. Patient Capital’s shares closed at 102p on the first day of dealing (21 April). I’ll note the IIPA prices at the same date — Allied (687.5p), IP (219.1p) and Imperial (490p) — and perhaps revisit the subject in the future.