I’ve been highly critical of Neil Woodford’s Patient Capital Trust (LSE: WPCT) over the last couple of years. Here, I’ll explain why I’m continuing to avoid it, despite the board having recently reined Woodford in on gearing and new investments.
By contrast, I’d be happy to buy Caledonia Investments (LSE: CLDN), one of whose strategies also deploys so-called ‘patient capital’ — that’s to say, capital invested on a longer time horizon, with intensive support of management of the investee company, in anticipation of an ultimately higher return.
Concerns
My biggest concern about Patient Capital Trust has been its rapid morphing into a far riskier investment proposition than that suggested by its launch prospectus.
In particular, Woodford got the board to raise the ceiling on the proportion of unquoted companies he could hold (from 60% to 80%) and to drop a policy of not using long-term gearing (£150m borrowing facilities were arranged and utilised).
My other big concern is that some of the unquoted companies are in the books at what could prove to be over-rosy valuations, due to the subjective nature of such valuations.
Discount doesn’t tempt me
Since the gating of Woodford’s flagship Equity Income Fund and his plan to sell its unquoted and illiquid holdings, many of which are also held by Patient Capital, the latter’s share price has dived to a steep discount to net asset value (NAV) — currently 33%.
The board has recently agreed a schedule with Woodford to halve the level of gearing within six months and to be ungeared within 12 months. Woodford also now has to get board approval for any new investment or further investment in existing assets.
I view this as shutting the stable door after the horse has bolted. Furthermore, I think it’ll only add to the pressure on the valuation — and in some cases survival — of the investee companies. As such, even the 33% discount to NAV doesn’t tempt me.
Patient capital context
Caledonia Investments is a long-established trust. There’s a particular context for its deployment of patient capital: “Our heritage can be traced back to the shipping empire established by Sir Charles Cayzer in 1878. We continue to enjoy the backing of the Cayzer family, who own some 48.5% of the share capital. The Cayzer family shareholding provides both support to our long-term value investment horizon and provides a foundation to our culture of conservative generational wealth management.”
Differentiated portfolio
The trust employs four strategies. In what it calls its Quoted Pool there are “high-quality compounding companies.” Its current 19 core holdings include Microsoft, Nestlé and AG Barr. Well-known listed companies also feature in its Income Pool. These include the likes of Lloyds, GlaxoSmithKline and Imperial Brands.
Its other two pools — Unquoted and Funds — target higher returns. In the Unquoted Pool there are 11 established UK businesses in which Caledonia has a majority or significant minority interest. For example, Cooke is the market-leading UK manufacturer of premium-end cinematography lenses for film and television. Meanwhile, its Funds Pool is focused on US and Asian private equity funds.
I like Caledonia’s differentiated portfolio and deployment of patient capital in the Unquoted Pool. The stock is trading at an attractive 16% discount to NAV. It also offers a 1.9% dividend yield, and has a record of 52 consecutive years of dividend increases.
