An attempt by Neil Woodford to free up liquidity in his flailing Equity Income fund in the months leading up to its suspension last summer has resulted in investors now nursing losses of 74% on shares in the former Woodford Patient Capital Trust.
In March 2019, Woodford Equity Income acquired a 9% stake in the listed closed-ended fund in exchange for offloading unquoted companies in the open-ended fund, which had breached its 10% limit for these type of illiquid companies on several occasions. The transaction, valued at £73m, highlighted the liquidity problems Woodford was facing in his funds and foreshadowed the problems that would lead to the fund suspension three months later.
The transaction was contentious at the time with investment trust analysts arguing the share swap was more beneficial for the Woodford Patient Capital Trust, as it was then known, than for investors in the open-ended fund.
Now a regulatory filing, published on Monday afternoon, shows Woodford Equity Income investors have suffered heavily from the stake in the investment trust, which Link Fund Solutions, now overseeing the wind-up of the fund, effectively halved from 8.98% to 4.76%.
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Woodford Equity Income acquired the stake at net asset value, which was then 96.67p, but on 14 May, when the Link transaction occurred, it was trading between 23.64p and 24.76p. The stake had been purchased at NAV despite the investment trust then trading at a 13% discount, whereas now it trades on a 50% discount against an NAV of 50.5p.
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Although the absolute hit to Woodford Equity Income investors is notable, it more difficult working out the relative performance of the investment trust shares compared to the unquoted companies that were part of the share swap.
The March 2019 transaction involved shuffling stakes in five unquoted stocks out of the Woodford Equity Income portfolio: Atom Bank, Carrick Therapeutics, Cell Medica, Ratesetter and Spin Memory. All had already represented small holdings in Woodford Patient Capital.
They collectively represented £120.6m on a fair value basis at the end of December 2019, although that includes additional funding that was allocated to Atom Bank after the transaction with Woodford Equity Income.
Atom Bank is now the largest position in the portfolio representing 14.4%, according to the annual report for the period ended 31 December 2019. The Schroders UK Public Private trust was also part of a £50m funding round in the challenger bank at the start of the year with participation from BBVA, Toscafund and Perscitus LLP. It had represented 3.67% of the portfolio before the investment trust conducted the share swap in March last year, at which point its weighting nearly doubled to 6.76%.
In a recent webinar, Schroders managers Tim Creed and Ben Wicks, who replaced Woodford on the trust, warned they would not become an “endless source of capital” for holding companies.
Carrick Therapeutics also sits in the top-10 holdings, albeit representing a much smaller 3.1% of the portfolio. It had represented 0.95% of the trust’s portfolio before the share swap, at which point it increased to a 1.52% weighting.
Schroders did not provide information on the performance of individual stocks over the year in its annual report, which mostly covered Woodford’s management of the investment trust mandate up until 13 December when Schroders took over.
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