Neil Woodford’s decision to bow to pressure from investors and offload unquoted stocks from his flagship equity income fund to his patient capital investment trust has been heralded as a “sensible” move by fund selectors.
On Friday Woodford Investment Management published a statement announcing the Woodford UK Equity Income fund had sold a £73m tranche of the portfolio’s individual unquoted stocks to the Woodford Patient Capital Trust (WPCT) in exchange for shares in WPCT.
Following the transfer, the UK Equity Income fund will own 9% of WPCT and WPCT will account for 1.45% of the income fund. The five companies being transferred under the first part of the strategy are Atom Bank, Carrick Therapeutics, Cell Medica, RateSetter and Spin Memory.
Woodford Investment Management said the move signals the start of a strategy to switch the fund’s unquoted exposure from individual unquoted holdings to shares in WPCT. It added this will allow WPCT to increase its position in companies that the board views as the “the next wave of disruptors”.
Listened to clients
Woodford has come under increasing pressure and been removed from a number of buy lists due to underperformance and concerns over his positions in small, illiquid companies.
The Financial Conduct Authority has also noted that patient capital assets are currently constrained by liquidity and exposure limits in open-ended funds. In a discussion paper published in December it explored whether these restrictions are appropriate, or whether they should be relaxed.
Chelsea Financial Services managing director Darius McDermott heralded the move as “sensible” and evidence that the firm has listened to its clients.
He added: “They had some clear exposure to the small cap stuff when they launched the income fund given Neil’s history in his Invesco days of having a portion in some illiquid and early stage business, but I think some investors had become concerned about it.”
McDermott noted that even though income fund has done so poorly, he understands that the unlisted holdings have been the best performing part of the portfolio. “It has actually been the listed stuff that has struggled the most in the past two years,” he said. “So, what they have done makes sense.”
“There is so much noise when it comes to Woodford Investment Management as a business, some of it deserved some of it earned, but this seems a sensible transferring of asset all done in the correct way, respecting the investment trust rules and the board of Patient Capital.”
AJ Bell head of active portfolios Ryan Hughes also described the move as sensible, saying it tackles one of the problems that the Equity Income fund has had over the past two years, namely illiquidity.
“It is always a challenge to own illiquid stocks in a daily traded fund and with the selling pressure that the Equity Income fund has seen with the fund halving from over £10bn to less than £5bn, it must have created difficulties for Woodford.”
Blurring of intentions
However, Willis Owen head of personal investing Adrian Lowcock, said while the move will provide some clarity to investors on the unlisted element of the portfolio, it begs the question why investors would buy the Equity Income fund and have a chunk in Patient Capital?
He said: “Why would you buy a UK equity income fund to get 10% in patient capital? If you like Woodford it would be better to split your exposure yourself between the Income Focus fund and the Patient Capital Trust – rather than pay Woodford to do it for you. Maybe I am a purist but my equity income should be equity income.”
Woodford Investment Management chief executive Craig Newman said: “The Woodford Equity Income Fund has always aimed to deliver a growing income stream and a total return by investing predominantly in listed stocks, with some exposure to unquoted holdings to generate excess returns from disruptive technologies. These objectives remain firmly intact.
“Neil is as passionate on the unquoted asset class as ever but having listened to feedback from clients we believe that moving the exposure to the asset class via a collective fund rather than individual unquoted stocks makes sense – both operationally and from an investor view.”
