Unicorn Asset Management’s Peter Walls believes there is a contrarian opportunity in Schroder UK Public Private, the investment trust formerly known as Woodford Patient Capital, although he admits he underestimated the scale of its problems when he first bought in.
Walls (pictured) runs Unicorn Mastertrust, a fund of investment trusts, in which he aims to gain exposure to high-growth themes such as smaller companies and private equity that are unsuitable for an open-ended strategy.
The manager said the closed-ended sector lends itself well to his contrarian approach, in which he takes money out of trusts that have seen discounts narrow and recycles it into those that have seen them widen if he can spot a catalyst for improvement.
And this is the reason he originally bought into Woodford Patient Capital.
“As the performance deteriorated and as the news got worse and worse, my contrarian tendencies encouraged me to take a greater interest in it,” he said.
“I did add a little bit more to the position when the LF Equity Income holding was sold. Effectively I started looking at it when the news was getting very bad – this is post the revelations about listing companies in Guernsey to reduce the exposure to unquoteds in the open ended fund, and also the share exchange between Patient Capital and the open-ended [fund].
“So, I was aware that there were quite a lot of problems when I looked at the portfolio.”
The main one of these problems, according to Walls, was that some of the holdings were “probably worthless”: in particular, much-derided cold fusion developer Industrial Heat, which made up 6.25 per cent of the portfolio at one point, a position the manager described as “ludicrous”. It now stands at 2.9 per cent and although Walls remains unconvinced, he is much happier with this lower weighting.
“Having written those off, I could find a way of justifying dipping my toe in the water,” he continued.
“But with the benefit of hindsight, I would say that I underestimated quite how powerful the snowball effect would be on his empire: actually just dismantling it in pretty short order, and the impact that would have on the overhanging unlisted investments.
“There are a lot of moving parts in this portfolio and there is a lot of volatility.”
Walls bought in to Schroder Public Private at a low point of 24p, but his average buying price was 56p. The trust now stands at 26p with its performance hampered by a discount that has widened to 42.29 per cent.
Performance of trust vs index since launch
Source: FE Analytics
Yet the Unicorn Mastertrust manager believes the worst is now over for the trust and he is optimistic it will soon begin to turn itself around.
“When I look at it now under the direction of Schroders – I am thinking quite long term about this, about how it could have a decent vehicle to access companies in both the private and public arena – I take comfort that it will put everything it can behind this, while appreciating it will take time,” he said.
“And perhaps post-Covid it may take longer. But I am willing to stay with it. It is only 1.8 per cent of the portfolio, it’s not a big bet. But it is one I am willing to take within this diversified portfolio that I have.
“I certainly think there are one or two possibilities there that can be quite significant and I can’t think of a better team behind it really in terms of its commitment to get this thing back on track.”
This is a view echoed by Numis. In a note released in January it said it was reassured by the depth of experience, skill set and track record of the new management team.
“Overall, Schroders appears to be a safe pair of hands to turn around the portfolio,” said the group. “However, it will be some time before they can fully put their stamp on the portfolio.
“We believe the trust is only suitable for investors with a high risk tolerance, who are able to take a view on the largest holdings. It is also likely to require some patience before there is a significant turnaround.”
Looking more broadly at the wider market, Walls is optimistic here, too. While the MSCI World index has already bounced back to its starting level for 2020, he pointed out this has largely been driven by the small number of tech stocks that have benefited from the economic lockdown. Outside of this sector, he thinks valuations continue to look attractive
“I was doing a meeting with Aberforth the week before last,” the manager added.
“The historic P/E [price-to-earnings multiple] of its portfolio was 6.1x at the last reporting date. The last time it was there was 2008 to 2009 and it had a very good five years following that.
“If you go back to the record heights of the TMT [technology, media & telecommunications] bubble in 1999, its performance was looking absolutely dire, with unloved underlying holdings, but again it saw significant outperformance from 2000.
“I’m not trying to call value versus growth, there’s a lot more nuance to the whole thing, but in those areas that haven’t seen that recovery, I think there is definitely value.
“Are markets right to be that optimistic? I don’t know, I don’t tend to try to make forecasts. But I can understand why we’ve had that bounce.”
Data from FE Analytics shows Unicorn Mastertrust has made 146.43 per cent over the past decade, compared with gains of 83.59 per cent from the IA Flexible Investment sector.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The £94m fund has ongoing charges of 0.85 per cent.