The UK has missed out on wealth creation, jobs and creating global businesses by investors’ short-term approach which is “crippling” young businesses, according to FE Alpha Manager Neil Woodford. 
Speaking at the Winterflood Investment Trust conference, the manager of the £689m Woodford Patient Capital Trust said capital is imperative for young businesses to succeed, but investors are not giving them enough of a chance.
“If you look back at the history of industrial Britain, there are plenty of examples of how the application of capital facilitated lots of good things that happened in the industrial revolution and subsequently through the 20th century,” the manager (pictured) said.
“But unfortunately, as the 20th century unfolded, capital markets have lost that muscle memory for all sorts of reasons.
“Their approach to the provision of capital has become crippled by short-termism in my view and as a result, not enough of this long-term patient capital finds its way into businesses that need it.”
He said this has allowed him to find opportunities in the unquoted and micro-cap space, as the lack of capital available versus company requirements has made discounts extremely attractive.
Despite this, the trust has underwhelmed, with the net asset value (NAV) returns (those made by just the portfolio and not share price movements) down 7.91 per cent since launch.
Performance of trust NAV since launch
Source: FE Analytics
“We would certainly not have wished for the environment that has enveloped us as investors, which is one that has been incredibly hostile,” Woodford said.
He noted that both unquoted and quoted healthcare stocks have been in a bear market for much of the last two years, impacting the two-thirds of the portfolio weighted to the sector.
Despite being called ‘Patient Capital’, he said investors have not been willing to remain patient, instead focusing on the short-term performance of the trust.
“Lots of people would claim to understand the long-term nature of the fund, and certainly would argue they are aligned with it, indeed they are not,” he said.
“The reality is that our industry is crippled with short-termism still and the media who commentate on what I’m doing are equally obsessed with the short term.
“I have been variously criticised as being foolhardy or deluded, et cetera, because I haven’t delivered on patient capital. But the fact is that we didn’t say we would deliver and the name implies that people should wait a little while.”
While the manager has a “reasonably thick hide” to deal with such criticism, he argued that it has a profound impact on these young companies.
“It is so dispiriting for those people who have ambition and great technology, people are incredibly discouraged by this background,” he said.
“What disappoints me most about it is [that] it yet again reflects the crippling disadvantage we impose upon ourselves as an economy.”
Woodford said one example of investors’ short-termism is the difficulties companies are finding upon listing.
Many go public on the belief that the same business is worth more in public ownership than when it is privately owned, but that relationship has broken down, he said.
“Investors are frankly running away from this space and nobody really wants to know,” Woodford explained.
And for companies that have listed there is no scope for them to make mistakes, as once shareholders are involved any bad news can be seized upon.
“What they are finding is unfortunately that with no institutional interest, tiny amounts of trade in the stock [can] drive the share price down,” he said.
“Eventually those companies get into a very difficult situation where the share price is so low that they can’t raise more capital and they are imprisoned by the public market and unable to fund themselves.”
Another example, Woodford said, is the release of negative research notes from the likes of New York-based investment firm Kerrisdale Capital, which has drawn widespread attention from the media.
Three years ago, the firm wrote a report suggesting shares in technology venture capitalist firm Allied Minds would fall. Since then the share price has fallen by 77 per cent from 725p to 165p.
Performance of stock over 3yrs
Source: FE Analytics
Recently, the firm released a note on another of Woodford’s top holdings – biotech firm Prothena – predicting that trials on its next main drug under development would fail.
“My view is that both Allied Minds and Prothena – two businesses I know better than most – are in great shape and have probably never been in better shape,” Woodford said.
“They are founded on good management, great technology and great potential – none of which serves the purposes of Kerrisdale whose job it is to scare the market about a business where they see an opportunity to make money from shorting the shares when the market is prepared to be scared.
“It doesn’t matter that what they have said about Allied Minds or Prothena in my view is totally factually inaccurate and unsubstantiated. What matters is that Bloomberg and others give them the oxygen of publicity and, hey presto, there is this self-fulfilling prophecy, the share prices go down and everyone thinks they are really smart.”
This short-termism has seen some investors sell-out of Woodford Patient Capital since its launch, driving the share price down by 16.6 per cent.
This means that investors at its launch have made a combined NAV and share price total loss of 16.46 per cent, as the below chart shows.
Performance of trust since launch
Source: FE Analytics
“We said right at the start that the clue is in the name and that investors should be patient and said judge us on our three-to-five year outcome and unfortunately – no surprise – the market has been anything but patient,” Woodford said.
The manager said rather than share prices, which don’t always accurately reflect what is happening in a business, he looks at a number of real-world metrics to determine success.
“We measure progress based on the execution of business plans, the achievement of milestones and the advancement of technology through the various stages – so we measure progress based on real-world experience,” he explained.
“That progress is significantly further advanced than I would have said when I started the trust but, of course, what has separated from that process is the share price and valuation.
“We don’t control either but what we have controlled and what we have influenced is the real-world events that take place in the companies that we have invested in.”
Woodford Patient Capital Trust is 20 per cent geared, has an ongoing charge of 0.18 per cent and is trading at a 9.1 per cent discount to NAV, according to the latest data from the Association of Investment Companies.