Research firm reverses stance on Woodford discount

Kepler had previously claimed Neil Woodford was the victim of ‘tall poppy syndrome’

Kepler Partners has cautioned it doesn’t see the discount on Neil Woodford’s Patient Capital Trust narrowing anytime soon while it remains in the shadow of his suspended equity income fund, a striking contrast from last year when it claimed he was the victim of “tall poppy syndrome”.

Kepler identified reputational issues impacting the wider investment business as “the major concern” for investors, in its latest report on Woodford Patient Capital Trust.

“The discount has widened out to 45% following the shuttering of the open-ended Woodford Equity Income fund, which raised the possibility that the manager will have to sell some of the shared holdings in WPCT and the open-ended funds,” the note said. “With the possibility that stakes would have to be sold below carrying value, this would mean write-downs to the NAV of the trust.

“Additionally, the open-ended fund holds 8% of WPCT shares which, again, if the fund is a forced seller this could further negatively affect the share price.”

Returns since launch have been “disappointing,” Kepler added, noting that net asset value (NAV) has fallen 20.2%, while the share price is down 56.9% thanks to the widening summer discount. The FTSE All Share by contrast is up 22.5% over the same period, it pointed out.

The one silver lining highlighted by Kepler is the fact the trust does not pay an annual management fee. While there is a performance fee, it won’t be payable until the NAV reaches 146p, an almost 50% uplift to its current level, it noted.

‘Iconoclastic’ investor

Kepler’s latest analysis of Woodford’s trust is considerably more downbeat than the prognosis it made a year ago when it painted the equities manager as a victim of his own success.

Referring to him as an “iconoclastic” investor, the research house noted his “impressive” knack for blocking out the noise and sticking to his convictions and rejecting the “machinery” of portfolio construction.

It chalked up stock specific setbacks from the likes of Prothena, which saw shares fall 70% in 2018 and became a short-selling target, as “small beer” and said there was a chance history could repeat itself and Woodford’s unpopular calls could turn profitable as they did when he avoided the 2000 dotcom bubble and made successful calls buying into big tobacco and pharmaceuticals when they were out of favour.

Slow progress

In its latest analysis Kepler noted progress on many of Woodford’s unquoted picks has been “slower than anticipated”.

Benevolent AI, the trust’s largest holding at 8.93% at the end of May, is still seeking a route to maturation and is not yet profitable, it noted.

Other major holdings like Rutherford Health, formerly Proton Partners, cold fusion company Industrial Heat and Autolus have suffered from other issues like lower barriers to entry, unproven technology and delays to drug projects respectively.

Of the trust’s top 10 holdings Kepler said Oxford Nanopore showed the most promise, noting that its gene sequencing reading technology has received “significant validation” by being picked up by a larger rival and it has received a major investment from US biotech giant Amgen.

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