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Why Woodford is suffering from “tall poppy syndrome”

16 August 2018

Kepler Trust Intelligence explains why Woodford Patient Capital Trust remains unloved by investors and whether it now presents an attractive entry point.

By Maitane Sardon,

Reporter, FE Trustnet

While some criticism of Neil Woodford’s Patient Capital Trust is fair, the manager is suffering from a “tall poppy syndrome” or, in other words, being attacked because he is believed to be superior to his peers, according to Kepler Trust Intelligence.

In its latest update, the research house argued that general negative sentiment towards Woodford Patient Capital Trust (WPCT) is partly due to the manager’s competitors’ temptation to attack or criticise the veteran investor now that the trust is underperforming.

“While some of the criticism is fair, and there have been mis-steps, the temptation has been strong for observers and competitors to attack the man who was previously the acknowledged stand-out performer among his peers,” the Kepler analysts noted.

Although some stockpicking decisions have hurt returns, investors need to understand the nature of the portfolio and the FE Alpha Manager’s investment approach, they argued.

“The concentrated nature of the portfolio compounds the damage to investors just as it would magnify gains,” the analysts said.

Performance of trust vs sector since launch

 

Source: FE Analytics

Despite being one of the most high-profile fund launches in recent years, Woodford’s closed-ended strategy has seen a disappointing performance since its inception.

Since launch in 2015, the £653.3m Woodford Patient Capital trust has lost 20.87 per cent compared with a gain of 33.80 per cent for the average fund in the IT UK All Companies sector, as the above chart shows.

The fund looks to invest in early-stage, privately-owned companies predominantly in the biotechnology and technology sector, which, as the research house noted, makes it a more high-risk proposition that investors should consider before buying the Woodford-branded trust.

“It is possible that many investors have bought this for the wrong reasons in the past,” they said. “There is a certain leap of faith involved when investing in WPCT, as this trust is different from the funds Neil has usually run.


 

“We consider this a high-risk portfolio with potentially exceptionally high returns, which should be bought for the long term as a small part of an investor’s portfolio.”

The team warned returns in the short term are likely to be driven by a few concentrated positions, so investors need to be comfortable with these exposures.

However, the Kepler team said over the longer term more of the 90 names should come to prominence and “materially affect returns”.

The analysts said investors should also remember that Woodford has experience investing in early-stage companies over the decade prior to launching Woodford Patient Capital Trust.

As such, and in spite of issues with certain individual stocks, they noted analysis shows the unquoted part of the portfolio has generated positive NAV [net asset value] returns since launch, with the previously-unquoted listed stocks being “particularly strong performers”.

“Attribution analysis shows the trust’s holdings in unquoted stocks have been net gainers since launch, and there have been recent significant gains from the flotation of Autolus, both of which may indicate there is potential in the portfolio,” the firm said.

“This gives some evidence that Neil’s stock-picking can be effective in the unquoted sector.”

Performance of Autolus since flotation

 

Source: Nasdaq

The trust – that can hold up to 80 per cent in unlisted equities – currently has 65 per cent in unquoted stocks, slightly less than at the start of 2018.

Some of the trust’s largest positions are currently healthcare-related, with top holdings including previously-mentioned biopharmaceutical firm Autolus Therapeutics, genetic sequencing firm Oxford Nanopore Technologies, and healthcare specialists Proton Partners International.

This exposure reflects Woodford’s approach, that focuses on picking businesses in whose management he has faith and that he believes can be successful through the use of new technologies.

Woodford tends to look at businesses on their own merits and does not aim to balance the portfolio across industries or sectors. This approach has also affected overall sentiment towards the fund, with the investment in neuroscience company Prothena gathering wide criticism.


 

Although Woodford has reduced exposure to the holding, it continues to be one of the fund’s top ten stocks with a 3.23 per cent weighting in the portfolio.

“Prothena is a fascinating case study in his stubborn and contrarian approach to investment,” noted Kepler. “It is illuminating how he was willing to let the company drift up to be a large concentrated position in the trust, ignoring criticisms of over-concentration.

“Neil views this as an essential feature of investing in early-stage stocks – they will be highly volatile and to benefit from the growth potential an investor has to be prepared to see through the volatility, on the upside as well as the downside.”

This became apparent following the launch of the trust when it quickly saw share price rise to a premium to NAV of 15 per cent, before moving to a discount as sentiment towards UK assets grew following the EU referendum.

“Some poor results from portfolio companies have helped the discount widen,” they said. “We would note the differing fortunes of the mainstream UK and global equity trusts however: since the vote to leave the EU, global trusts have seen their share prices move close to par while UK trusts have slipped onto a wide average discount.

“This gives some credence to Neil’s contention that the macro-economic environment and investor sentiment have had a significant part to play in the disappointing recent fortunes of the trust.”

 

Discount/Premium since launch

 

Source: FE Analytics

Data from the Association of Investment Companies (AIC) shows the trust currently trades at a 15.1 per cent discount, which the research house noted is “an interesting entry point given the potential for significant lumpy returns and its history of trading on a premium”.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.