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Woodford Patient Capital

June 4th 2019 – Written by Andrew Chorley

Woodford Patient Capital

You may have read in the Press today that trading in Neil Woodford’s Equity Income Fund has been suspended. The Investment Trust “Woodford Patient Capital” forms part of most of our Model Portfolios and whilst this is a totally different fund in type and objective we felt that it was crucial we provided our take on events and provided you with some additional information

There has been a lot written about the trials and tribulations of the flagship equity fund that Mr Woodford set up following his departure from Invesco Perpetual.

Our view is that the strategy that many investors expected is very different from that of the Invesco Funds with which Mr Woodford made his name as one of the finest ever UK Fund Managers. The new fund had looked more towards smaller cap funds and unlisted holdings in areas that where he has great experience.

These strategies take time to play out and are by nature more volatile than the multi-national Healthcare, Tobacco and Oil Companies that dominated Invesco High Income providing it with consistent income as well as growth at the right times.

Perhaps investors weren’t paying attention to what was in the portfolio and blindly assumed Woodford Equity Income was the same.

Perhaps Mr Woodford should have been clearer on his strategy and long term expectations for performance and potential volatility.

The high holding in illiquid shares (10%) means it is difficult to sell these assets when investor in the open ended fund ask for their money back – effectively creating a run on the fund and forcing asset sales.

Either way there seems to be a mismatch between investor expectations and what the new fund has achieved in the near term; this has been compounded by events such as Hargreaves Lansdown removing it from its Wealth 50 and Kent Council withdrawing £250m from the fund.

Investors take notice of this and don’t consider the fact that analysts and advisers face “career risk” in that its safer to jump ship early with everyone else regardless.

Another good example of this is Winterflood Securities who removed Woodford Patient Capital from its model portfolio on sentiment reasons alone even though it is unaffected by the suspension and they see its holdings making good progress with potential catalysts for improved performance later this year! Source Investment Week 4th June 2019

We recommended adding Woodford Patient Capital to client portfolios in March/April 2018 and since then we had seen some healthy returns before declines of almost 10% today (4th June) moved us into negative territory.

For us – and you – this should be no reason to panic! Our process and strategy means that the impact for clients should be minimal.

Risk Controls

We always saw this as a “value” buy that would be volatile; offering the potential to win big. This type of holding sits in our “satellite” component of portfolios and is typically limited to a maximum of 3% of a portfolio. If we make a big return it will have a reasonable impact; when we added to portfolios the fund was already down over 35% from its peak and whilst it can fall further a loss of say 10% would only impact overall portfolio returns by 0.3% (3% x 10%). At the same time diversification is hopefully offsetting any declines as other assets are performing well.

Structure of Fund

Unlike the open ended fund that has been suspended where assets have to be sold to deal with investor requests for money to be returned Woodford Patient Capital is a Closed Ended Fund. This means shares are traded on the Stock Exchange and investors buy or sell these; the assets of the trust don’t need to be sold. This means long term strategies can be allowed to play out the price of the Trust’s Shares are simply affected by the number of buyers or sellers.

Long Term View

We continue to take a long term view and hope that Mr Woodford is given the time to allow his strategies in Woodford Patient Capital to play out – as we said previously the clue is in the name! At the same time, we understand we must be rational; just because we like the Trust it doesn’t mean we are right and the price will undoubtedly go up. There are risks and we will continue to monitor the situation rationally safe in the knowledge that our risk controls allow us this luxury. 

EST. 1999