Both before and after launching at 100p a share two years ago, Neil Woodford’s Patient Capital Trust (LSE: WPCT) has generated a lot of column inches. Despite an initial rise, it’s also lost a few friends along the way.
Now trading 7% lower than its issue price, are some investors right to be selling up or is this simply another example of the market becoming more short-termist than ever?
Early days
Last week’s annual financial report on the trust for 2016 made for interesting reading.
All the money received by Woodford at the launch of the fund has been fully invested in unquoted and quoted companies. According to the report, many of these are beating expectations on an operational level, with the early stage, unquoted element yielding positive returns.
Some of the trust’s larger holdings, such as Purplebricks, have done particularly well. Despite dipping to 105p last December, shares in the disruptive online estate agent rallied over 200% to more than 350p in March after the company declared its intention to move into the lucrative US market following its recent venture into Australia. Biotech companies, Prothena and unquoted Immunocore were two other holdings that had “exceeded expectations“.
Despite this, Woodford Patient Capital Trust’s net asset value dipped 4.2% over 2016 to just over 93p with businesses such as Allied Minds and (biopharmaceutical) Circassia – whose share prices more than halved — proving a huge drag on performance.
While understanding holders’ disappointment, the UK’s star fund manager went on to reaffirm that the trust was never designed to deliver “significant short-term wins“. The “disconnect” between the myopia of the stock market and the needs of new, emerging companies underlines why the trust performed the way it did last year, he explained.
Looking forward, the trust’s portfolio — currently comprising 71 holdings — is likely to become more concentrated as time goes by and “value emerges“. Its geographical reach is also likely to increase as some constituents of the predominantly UK-focused trust gain a global presence by listing overseas. In addition to this, Woodford is proposing to raise the maximum amount of money he can invest in unquoted companies, from 60% to 80% of the trust.
The Verdict
The performance of the Patient Capital Trust over 2016 — and investors’ apparent disenchantment — is a salutary lesson in knowing why you’re investing and for how long.
As its prospectus clearly stated, the trust’s 10% targeted return per annum was never guaranteed and this will remain so. In my view, it’s better to focus on the fact that the fund offers investors previously-denied access to a diversified group of early stage companies, some of which — over the long term — could thrive.
Compared to some managed funds, its annual cost of 0.2% (inclusive of transaction fees) is also inviting, as is the fact that Woodford earns no fee unless cumulative returns above 10% are met. For a long-term investor, that sort of number is vitally important as high management fees can drastically reduce any gains made over time.
It can’t have been easy for investors to watch the value of their holdings fall while the main indexes have moved ahead over the last year. Nevertheless — given time, the small-cap effect and Woodford’s pedigree — the chances that it will come good seem reasonably high. For me, the Patient Capital Trust remains the ultimate buy-and-forget investment.
