The news for followers of tainted investment guru Neil Woodford has not been getting better. Governor of the Bank of England, Mark Carney, has also been scathing in his criticism of funds like the Woodford Equity Income Fund.
According to Carney, such funds are “built on a lie, which is that you can have daily liquidity for assets that fundamentally aren’t liquid.” And that’s really been the core of the problem.
Though labeled an “income” fund, which most investors would probably assume is built on dividend-paying mature (and liquid) assets, it was instead invested heavily in poorly liquid and unquoted illiquid investments.
Run
The run on the fund that has happened in the past few months has forced it to deplete its actual liquid (and relatively less risky) investments in order to stump up the cash. And that’s left the fund further concentrated in illiquid investments, which has worried investors further and led to more wanting to get their money out.
Although Woodford’s investment trust, Woodford Patient Capital Trust (LSE: WPCT) is not directly affected by the troubles of the Woodford Equity Income Fund, it’s suffered badly since the shock news of the latter’s suspension hit the headlines.
Since trading in the Equity Income Fund was suspended to give Woodford a chance to switch to greater liquidity, shares in Woodford Patient Capital have slumped by 23%, and they’re down more than 30% over the past 12 months.
Trust
But as it’s an investment trust, it’s not possible for anyone to withdraw any funds anyway, and so there can’t be a run of the same kind. All investors can do is buy and sell shares in the trust itself, and a trust’s managers can carry on with their long-term strategy without any short-term liquidity worries.
Based on the latest net asset value per share (NAV) for the trust of 83.1p on 25 June, the current WPCT price of 55.6p puts the shares on a discount to NAV of 33%. Investment trusts typically do trade at a discount, but that big a gap is way ahead of what’s usual, and it could easily signify a good value investment right now.
One thing that does count against it, though, is that Woodford Patient Capital holds a fair few investments in “jam tomorrow” companies (and in unquoted firms), and for them it’s largely impossible to calculate any objective asset value.
With a profitable quoted company, asset values are relatively easily deduced from their market-cap, but market-caps of unprofitable blue-sky companies can be very subjective and very volatile, and unquoted investments have no effective market-cap at all to use.
Skill
If you’re considering investing in Woodford Patient Capital Trust now, I think you have to do it based on your trust in Woodford’s stock picking ability. And generally, despite a few howlers (like Purplebricks) I don’t think that’s really changed at all and I still think he’s very good at the job.
But the bottom line for me is that I’d only invest in WPCT if I’d invest directly in the speculative stocks it holds. And I wouldn’t do that, so I’m out. But if “jam tomorrow” investments float your boat, I think it could be a good time to get in.
