21st April 2023
Exactly 8 years ago, on 21st April 2015, the Woodford Patient Capital Trust raised a record amount of money at IPO for a London-listed investment trust. Such was the popularity of the fund manager, Neil Woodford, and its exciting mandate of investing in early-stage British companies, that just prior to launch, the size of the Trust increased from the original targeted £200m (with maximum set at £500m) to £800m. So confident of success, an innovative and shareholder-friendly management fee was introduced with a zero annual charge and a performance fee of 15% of returns above a 10% annual compounding hurdle, meaning the manager would only get paid a fee if shareholders enjoyed at least a 10% annual return. The Trust traded at a healthy premium to its net asset value for a year post-launch with a further 27m shares issued to satisfy demand. Woodford Patient Capital Trust was regarded as a major success story for the investment trust sector, and sentiment towards the Trust could not have been better, evidenced by the c.10% average premium in its first year. However, that didn’t last.
Wind forward to today (I’m deliberately omitting the events in between as all that has been well reported in the press and I wouldn’t be able to cover it in 10 Crescendos let alone one!) and the managers of Schroders UK Public Private (about to be renamed Schroders Capital Global Innovation), feel confident that the portfolio is in really good shape and that the net asset value may have troughed. While that is no consolation for long term shareholders who are still sitting on huge losses, it allows investors like us to review the Trust afresh, especially when the shares traded at a 50% discount to the net asset value. Prior to our gradual introduction of the shares to our three funds in recent weeks, we engaged with the managers and the Board of Directors on a number of occasions. We needed to get comfortable that all those involved in running this Trust appreciated the exasperation of shareholders, and how long it might take before shareholders get to see the share price point upwards for a change, and what they are able to do about it. It was clear that the Board were also very frustrated, and they appreciated the turnaround has taken longer than anyone expected and were committed to narrowing the wide discount. In the latest annual report, the Board has followed through with that commitment and initiated a share buyback programme and a continuation vote in 2 years time.
This Trust showcases a number of attributes active investment trust investors like us look for:
- The classic perception versus reality trade where a wide discount reflects the negative sentiment caused by problems of the past, instead of the reality of what is likely to happen in the future.
- A potential double-whammy of a discount narrowing at the same time as the NAV rises, creating a powerful return from the nadir.
- Successful engagement with management and directors to gain a valuable insight into the dynamics within the portfolio as well as the mentality, ensuring alignment of interests with shareholders.
- An each-way bet where a corporate event on the horizon, in this case a continuation vote, means heads we win, tails we don’t lose. If performance is excellent, then shareholders will be happy, new shareholders will be attracted in and the discount should narrow naturally. If performance remains disappointing, the continuation vote will likely fail and the discount will narrow as that becomes widely expected, leading to a return of capital to shareholders at a close to the prevailing NAV as possible (I accept it will not be straight forward for an unlisted portfolio but it can happen and has happened successfully many times before).
- A wide margin of safety once we calculated that the pure unlisted part of the portfolio was priced at close to a 75% discount.
This is the remarkable story of an investment trust going from the most-loved to the most-hated in the space of a few years and the opportunity to invest at the point of maximum pessimism.
The investment trust sector is trading at its widest average discount for many years with widespread opportunities, making investment trust geeks like us very excited about the prospects for returns in the future.
Daniel Lockyer – Senior Fund Manager
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