A rare value opportunity has emerged in Woodford Patient Capital Trust as the misunderstood investment trust's discount has widened to more substantial levels recently, according to Seneca Investment Managers’ Richard Parfect.
Parfect said Seneca began building a position in the trust as part of its allocation to private equity after the initial public offering of investing platform AJ Bell last year.
“We are holders of AJ Bell and have been since 2005,” he explained. “We had quite a lot of money come back from that and that’s now moved into our listed UK equity portfolio. The experience we garnered from that was how powerful investment in owner-managed businesses can be and this falls under patient capital as a theme.”
As such, the manager said the firm decided to recycle some of the profits into a new holding: Woodford Patient Capital Trust.
The embattled closed-ended strategy has been added to the portfolios of the five FE Crown-rated LF Seneca Diversified Income and LF Seneca Diversified Growth funds.
The trust, launched by FE Alpha Manager Neil Woodford in 2015, targets long-term capital growth through investing in listed and unlisted UK companies, with a long-term aim of returning in excess of 10 per cent per annum.
But it is not a completely unknown entity for Parfect, who backed the trust at launch.
“We were investors at IPO back in early 2015 and we exited that over the first six months of the trust’s life at a premium to net asset value [NAV],” he said. “We felt that a bit of euphoria had gone on and the premium to NAV was insufficient reward for the risk.”
However, more recently it has faced criticism over its lacklustre returns.
Performance of trust vs sector since launch
Source: FE Analytics
Since launch, Woodford Patient Capital Trust has made a loss of 13.65 per cent compared with a 24.67 per cent gain for its average IT UK All Companies peer, as the above chart shows.
Weak sentiment has led the trust to trade at a discount to NAV of 11.58 per cent, a figure that has been as wide as 19.08 per cent during the past year, according to data from the Association of Investment Companies (AIC).
Yet, that has helped create an attractive entry point for the Seneca team.
Parfect said that he began investing in the trust just before Christmas when the discount was around 15 to 17 per cent and has benefited from a narrowing since.
“Essentially, we are value investors and we look for opportunities where there is a mismatch between price and value and that is certainly what we’ve seen with Patient Capital Trust,” said Parfect. “It’s the flipside of what we saw back in 2015 really and we think that the news flows are on an upward trajectory and in time the share price may catch up with that.”
Discount/premium since start of data
Source: FE Analytics
“We just feel that markets are sentimental beings and if the market becomes overly emotional in either direction, that creates opportunities for investors with a long-term mindset such as ourselves,” he explained.
“We’re not concerned by Neil’s issues, we’re not investing in his OEICs – we wouldn’t be, we invest in UK equities directly – but we observe with a wry smile the criticism being levelled at him and that has transposed into the rating of Patient Capital Trust.”
The manager highlighted the J-curve theory of investment, which illustrates the tendency for private equity-style strategies to make losses in early years and gains later as investments mature.
Having faced much criticism over the returns of the trust, Woodford responded last year with a defence of the strategy, claiming that the asset management industry was “crippled by short-termism”.
https://www.trustnet.com/news/787182/neil-woodford-our-industry-is-crippled-with-short-termism
“We’ve seen that with Woodford Patient Capital, the NAV hasn’t really lost over its life,” he said. “It’s more or less where it was at the beginning.
“The news flow has improved and there’s been a tangible advance in its business cases, which over the last six-to-nine months has become more positive. But the sentiment towards the trust hasn’t really caught up with that and is probably afflicted by the wider criticism that Neil is facing.”
Parfect said that as the trust was marketed heavily to the IFA and private investor markets, it may have been misunderstood.
“It’s a patient game and unfortunately the retail investment market is rarely a patient beast,” he said. “People expect a consistent return and that is not achievable in anything really: you have ups and downs and it is about playing the long game.”
The trust is one of two private-equity style trusts that the Seneca management has added to its portfolio in recent months, having also taken part in the IPO of Merian Chrysalis Investment Company.
“They’re both essentially doing a similar thing, albeit with companies at a different stage of their life cycles: Patient Capital Trust is essentially earlier on and a bit less proven in some cases, possibly.
“Whereas Merian Chrysalis is investing in companies that have had more funding rounds and are nearer to their IPO in due course. We’re essentially running a barbell strategy.”
The Merian trust aims to invest in a concentrated portfolio of attractively valued private investments with long-term growth rates substantially higher than the average UK company. It is overseen by Richard Watts and Nick Williamson.
Since launch in November, the trust has made a loss of 0.48 per cent compared with a 2.14 per cent loss from its average IT Private Equity peer. The fund is currently trading at a premium to NAV of 4.6 per cent and is not geared.
Woodford Patient Capital is 19 per cent geared and has ongoing charges of 0.18 per cent.
Performance of funds over 3yrs
Source: FE Analytics
Over three years, the LF Seneca Diversified Growth has made a total return of 36.73 per cent, while LF Seneca Diversified Income is up by 28.96 per cent.
The £117.9m LF Seneca Diversified Growth has an ongoing charges figure (OCF) of 1.24 per cent and a yield of 3.2 per cent. The LF Seneca Diversified Income has a yield of 4.96 per cent and an OCF of 1.16 per cent.