Woodford trust rattled by shared holdings with open-ended fund

Three quarters of Patient Capital holdings also sit in gated Equity Income fund

Woodford

Woodford Patient Capital Trust shares have slumped on concerns its holdings that also sit in the Equity Income fund could come under pressure as the open-ended fund seeks to manage redemptions.

Shares in the £695m investment trust fell 15% on Tuesday morning following news Woodford Investment Management had suspended trading on the Equity Income fund.

Winterflood Investment Trusts removed the Patient Capital Trust from its model portfolio as a result.

Share Centre holdings WPCT

The Share Centre Multi Manager Adventurous fund currently holds 5.7% in the investment trust, according to FE Analytics.

Share Centre head of investments Andy Parsons described the share price movement as “almost inevitable” given the spotlight on Woodford Investment Management.

Parsons added: “Investors should however remain cognisant that while they are both part of [Woodford Investment Management] they are separate vehicles striving to achieve different investment objectives/strategies.”

He said short-term investor sentiment was likely to weigh on the trust.

Sentiment and structural issues

Winterflood research analyst Kieran Drake said in a research note that up to 74% of the Patient Capital Trust portfolio by value was invested in companies also held by Equity Income, as of the end of April. “As the manager restructures the WEIF [Woodford Equity Income Fund] portfolio we believe that there is potential for the share prices/valuations of its holdings to come under pressure.”

The 14.7% discount on Monday widened to 21% by Tuesday and could come under further pressure if Woodford Equity Income reduces its stake in the investment trust, a transaction it only established in March as part of a stock switch to reduce the open-ended fund’s exposure to unquoted companies.

JP Morgan Cazenove estimates 9% of the trust is held by Equity Income, but argued it would be difficult to conduct a further stock switch as conflicts of interest are now higher than they were at the point of the first transaction.

The board is able to fire Woodford with three months notice, JP Morgan Cazenove noted. It raised the possibility the investment trust could become a target for predators if its discount remains extended.

The situation in Equity Income could also limit Woodford’s ability to support the portfolio’s early-stage companies, Winterflood said.

Gearing on the investment trust is currently 16%.

Open-ended versus closed-ended funds

Winterflood compared the gating of Woodford’s open-ended fund to property fund suspensions in the wake of Brexit, which highlighted the benefits of closed-ended funds for holding illiquid assets.

Tilney managing director Jason Hollands agreed that Patient Capital Trust was “much better positioned” for holding illiquid companies than Equity Income. “I am sure some investors will see the widening of the discount as an attractive opportunity to pick up the shares.”

Hollands thought most of the share price fall would be sentiment driven “given the extent of media attention that the manager has faced in recent days”.

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