Woodford Patient Capital Update

The demise of Neil Woodford’s fund management operation has been an upsetting episode for the company’s employees and clients alike.  Coverage suggests the saga will rumble on for some time yet but we wish to focus on the immediate impact to Woodford Patient Capital Trust, a fund established to most accurately follow what were then Mr Woodford’s enthusiasms for smaller, innovative and often unquoted companies. It was constructed as an investment trust, launched to much fanfare in 2016, raising £800m in the process. One might have needed the patience of a saint to maintain a shareholding under the strain of a steady deterioration in the share price since.

A feature of investment trusts is an independent board who can sack a manager and appoint a new one. The trust’s board have now terminated the Woodford management contract and handed the portfolio to a team at Schroders after what they describe as a competitive process. How competitive we may never discover but we wonder how many would want such a poisoned chalice?

Schroders will manage the investments under the same policy – thus there are no wind-up plans in view – and a management fee will be introduced after a 3 month initial transition period. Woodford was effectively managing the portfolio for free at this point under the terms of the old contract. Further, no performance fee is payable until the end of 2022 whereupon there is a fee of 15% of excess returns above a net asset value, NAV, of 77p per share, currently 63 pence.

So the key question now becomes what can Schroders do that Woodford – who put the portfolio together – cannot? Not only is the prevailing mood against them but so too are the ‘usual’ headwinds of managing a portfolio of unquoted assets with seemingly little liquidity. We also face several unanswered questions about any revaluation or sale of assets and what might be the impact of the liquidation of the Woodford Equity Income Fund, WEIF, which itself holds 10% of Woodford Patient Capital?

Under such circumstances it is not surprising that even after a shot in the arm on the day of the Schroders announcement the shares still trade on a 43% discount to NAV. And, as we allude to above, what makes anyone sure about that NAV figure, anyway?

With shareholders now facing a management fee where there was none before and a new management team who are unproven in our eyes, a simple liquidation of the trust might have been preferable. However, noting a price significantly below reported NAV and with an incentive for the new manager to move values in the right direction, there is upside potential for battered shareholders.

As we maintain a watching brief on the wider issues of this saga we place a Hold rating on the Trust and await the outcome of the unwinding of the larger WEIF.

Share this article