A research report on Neil Woodford’s Patient Capital Trust has said the star fund manager is an “iconoclastic” investor suffering from tall poppy syndrome.
Kepler Trust Intelligence said returns from unquoted holdings are strong and the positive IPO of Autolus could herald a turn in fortunes for the investment trust, which it said has had a rough couple of years. It added the trust has potential to trade at a significant premium to rivals in the UK All Companies and Private Equity investment trust sectors.
“In our view, Neil is suffering from ‘tall poppy syndrome’,” the research report said.
“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.”
Kepler described the 9% fall in NAV since launch as “small beer” due to the fact early stage companies could grow by orders of magnitude. It said a few good results could prompt the trust to trade at a premium again.
Kepler confirmed Woodford did not pay for it to conduct the investment trust research.
Winterflood Investment Trust research has previously said the Autolus IPO gave some cause for optimism on the investment trust following disappointments from Prothena. In April, Prothena shares crashed 70% as it announced it was halting development on one of its key drugs.
Perils of star fund management
The research acknowledged Woodford’s popularity with retail investors saw the trust trade at a 15% premium shortly after launch, which ultimately swung into a discount in 2016 due to negative UK sentiment surrounding the Brexit referendum.
“It is possible that many investors have bought this for the wrong reasons in the past, buying the Woodford name without considering the nature of the proposition.” Since launch, the trust has lost 23%. Over the same period, the FTSE All Share has delivered total returns of 25%.
Criticism is part of the territory of being a fund manager, according to Tilney managing director Jason Hollands.
“When you are a prominent, high profile manager going through a period of turbulence inevitably you end up in the spotlight,” Hollands told Portfolio Adviser. “Investors will ultimately judge the vehicle on its overall return, which thus far has been negative in what remains a bull-market.”
The investment trust’s 10% discount compares to an 8% average on the UK All Companies trusts tracked by Morningstar and the 14% discount on the average private equity trust.
An ‘iconoclastic’ investor
Kepler argued the trust’s recent underperformance could be a repeat of unpopular calls he has made in the past that have ultimately turned profitable.
The manager notably avoided the 2000 dotcom bubble and stayed out of banks prior to the 2008 global financial crisis.
“His ability to block out others’ views when they overwhelmingly disagree with him is impressive, and he argues that his strength is in sticking to his positions when they are hit by what he views as irrational falls.”
In fact, Kepler describes Woodford’s style as “iconoclastic” as he rejects the “machinery” of portfolio construction, benchmarking and risk analysis developed academically and in large asset management companies.
Woodford believes that it is often the cover for “pandering to career risk and a recipe for timid decisions and ultimately poor long-term returns”, the research note said.
Unquoted companies
According to Kepler’s attribution analysis, unquoted stocks have been net gainers since launch, and significant gains from the Autolus float point to potential in the portfolio, the research note said. The trust made a gain of 238% on total cash invested in the biotech company, according to a regulatory filing published in June.
However, Hollands is more skeptical on the investment trust.
“While it is slightly encouraging that the unquoted part of the portfolio at least is in positive territory; and it undoubtedly remains early days for some of these companies which requires patience by investors, most private equity trusts and VCTs have delivered positive returns over this period, so is this such a big deal?”
The investment trust has a tilt to oncology. Alongside Autolus, Proton Partners, Immunocore and Precision Biopsy, all unquoted, feature in the top-10 holdings. “Cancer-care is seeing a flowering of new treatments and is a focus of healthcare policy given our increasing longevity leading to rising incidence of cancer,” Kepler said.
Sequencing and diagnostics, rare diseases and neuro-degenerative conditions are also themes liked by the investment team, Kepler said.
Prothena short-selling attack
Prothena is a “fascinating case study in his stubborn and contrarian approach to investment”, according to 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.” Woodford believes bringing holdings down to an arbitrary level of 10% requires him to raise his investment in stocks in which he has less conviction, Kepler said, acknowledging it is a high-risk approach and that concentration rules limit damage when fund manager calls go wrong.
Prothena was over 10% until it was hit by short-selling last November.
Woodford justifies the hit from Prothena to the portfolio by highlighting how the same approach has resulted in gains through the investment trust’s position in Autolus.
At the date of the last annual report in December 2017, the trust owned stakes greater than 20% in nine businesses, not accounting for cross-holdings in the wider Woodford business, Kepler noted.
Woodford’s open-ended vehicles
Woodford admits managing outflows from his open-ended funds has required him to prioritise the companies he has the most conviction in, the Kepler note said.
For this reason he did not participate in the latest funding round for Atom Bank, not due to liquidity restrictions in his funds, Kepler said. Woodford reportedly told the Atom Bank board in March he was “unable” to take part in a £150m share issue.
However, most of the companies resources are dedicated to the investment trust rather than Woodford’s open-ended vehicles.
Of the seven individuals in the team, two are devoted to FTSE 350 companies, which mostly means they do not work on this trust, and five on the investment trust or early stage companies, the note said. There is around 20% crossover with the equity income portfolios.
The report said the Woodford Patient Capital Trust is very different to equity income funds Woodford has run in the past, but said he has been investing in early stage companies dating back to the early 2000s.
