I’ve reconsidered my position on master investor Neil Woodford’s Patient Capital Trust (LSE: WPCT), having reviewed its development since its launch in April 2015. The shares have performed poorly — they’re trading at 83p versus an IPO price of 100p — but there are more fundamental reasons why I now rate the trust a ‘sell’.
The trust issued a prospectus ahead of its launch and the following table summarises how Woodford expected the portfolio to look “one or two years from admission”:
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|Company type||Characteristics||Portfolio weighting|
|Mature||Mid- and large-cap. Quoted companies. “Woodford’s high conviction blue-chip ideas.”||c. 25%|
|Early growth||“Typically quoted although may be unquoted companies.”||c. 25%|
|Early stage||“Likely to include both quoted and unquoted companies.”||c. 50%|
The trust appeared to offer a good balance between prudence and risk, with a decent chunk of the portfolio in liquid blue-chip stocks and even the second-tier early growth companies being “typically quoted.” While the weightings weren’t set in stone, there was a longstop on exposure to illiquid, unquoted companies, the prospectus declaring a maximum limit of 60% of net asset value (NAV) at the time of investment.
Also providing comfort on the risk front, the prospectus advised that while the trust was permitted to use gearing of up to 20% of NAV (at the time of borrowing), it “does not intend to deploy long-term gearing.”
Shaped up nicely
At the end of its first financial year (31 December 2015), it had shaped up nicely, being “substantially invested.” It held a small amount of cash and had no borrowings.
Mature companies, including FTSE 100 giants AstraZeneca, GlaxoSmithKline, Legal & General and Provident Financial, represented 30% of the portfolio. The early growth segment was at 23% and early stage at 46%. In terms of the balance of quoted and unquoted companies, the former had a weighting of 63% and the latter 36%.
A far higher risk proposition
However, the trust has morphed into a rather different animal to that envisaged in the prospectus. All its FTSE 100 holdings have been sold, the limit on unquoted companies has been increased from 60% to 80% and it’s dropped “does not intend to deploy long-term gearing” from its remit.
As of 30 November, I calculate that unquoted companies represented 78% of NAV and that Woodford had utilised £143m of a £150m overdraft facility, giving the trust gearing of 19%. The table below shows the top 10 holdings.
|Proton Partners International||Unquoted||n/a||4.5|
The four quoted companies are all lossmaking and hardly seem to fit the prospectus mould of “Woodford’s high conviction blue-chip ideas.” Indeed, with the portfolio also stuffed to the hilt with unquoted companies (many of which require ongoing funding) and with the overdraft and gearing limit almost maxed out, the trust now looks a far higher-risk proposition than when it launched.
The shares currently trade at a discount of less than 10% to NAV. I believe the discount should be much wider and I rate the stock a ‘sell’.