Shares in Woodford Patient Capital Trust (LSE: WPCT) plunged to a new all-time low of around 74p per share at the end of last month. That’s because investors have become increasingly impatient with Neil Woodford’s offering, which is yet to produce any returns.
The trust has suffered a 10% drop in net asset value over one year, and a 13% decline over six months, costing investors 22% since the beginning of September 2017. Following these declines, in early February the shares reached a discount to net asset value 13%, the widest gap since inception.
Having said all of the above, Patient Capital was established to invest with a long term outlook, so it shouldn’t really be judged on its performance over the past six months. Over the long term, Woodford and team are targeting a return of 10% per annum. Considering the fact that its portfolio is full of early stage and venture capital businesses, despite the recent performance, a double-digit annual return is still possible as these companies mature over time.
Nonetheless, the fact remains that this trust, as of yet, has still to produce returns for investors, which is why I would sell it and buy the HG Capital Trust (LSE: HGT) instead.
More established
There are many similarities between these two trusts. The biggest is that they both invest in fast-growing, unquoted companies in an attempt to achieve market-beating returns for investors.
However, HG invests in established businesses that have more predictable income streams and scope to generate better returns for investors.
Take for example the largest holding in the two trusts’ portfolios. Patient Capital’s largest holding is development stage biotech Prothena, which has no drugs currently on the market and recently lost its chief medical officer.
Meanwhile, HG’s largest holding is Scandinavian tech business Visma. This accounts for 18% of the portfolio and in the 11 years of ownership, Visma’s revenues and EBITDA have seen a compound annual growth of 17% and 23%, respectively. Visma is now positioned as one of the leading and largest SaaS companies in Europe. The two top positions in Woodford’s fund (Prothena and Oxford Nanopore), that together make up around 18% of assets, are both early-stage biotechs that have yet to produce any income.
Profit with profits
I’m not saying Patient Capital won’t produce its targeted return for shareholders over several decades, but what I’m sure about is that the company’s approach is riskier than HG’s route of buying established businesses with room for further growth.
The first few years of a company’s life is always the hardest, therefore buying when it’s already generating revenue and profit significantly reduces the risk to the acquirer. HG is also selling its investments at attractive multiples to generate impressive returns. Over the past year, the group’s net asset value per share increased 21.5% and cash realisations totalled £224m, of which £73m has been reinvested. Over the past 10 years, the trust has produced a compound annual return for investors of 11.7%, outperforming the FTSE All Share by 160%.
So, overall, considering its record of outperformance and value creation, as well as its different investing style, I believe HG is a much better buy than the Woodford Patient Capital Trust.
