It's around a year since the launch of Neil Woodford's second fund since setting up his own investment company, the largest ever UK domiciled investment company raising at £800m. Woodford Patient Capital Trust's (WPCT) initial public offering (IPO) was so much in demand that although it was only initially targeting £200m, with leeway to raise up to £500m, the amount was increased to £800m. Even with this increase the IPO was oversubscribed, and as soon as the shares started trading they moved to a premium to net asset value (NAV).
Over the following months they steadily trended up, at one point to a premium as high as 15 per cent - an unusual level among investment trusts focused on high-risk investments such as early stage and unquoted companies, that do not offer an attractive yield.
One year on and the euphoria has deflated somewhat. Woodford Patient Capital Trust now trades at a premium to NAV of around 3 per cent, and earlier this year even traded at a discount of nearly 4 per cent, due to market turbulence and investor caution.
The trust recently reported in its first set of annual results that between beginning to trade on 21 April 2015 and the end of last year its NAV decreased 1.5 per cent and its share price increased 1 per cent, though this was better than the FTSE All-Share's decline of 7.5 per cent over that period.
In January the trust said it was looking at ways to raise additional capital as it had deployed the proceeds of its IPO. But more recently in its annual report chairman Susan Searle said: "With the continuing uncertainty prevailing in markets, now is not an appropriate time to raise capital."
Raising capital at a time when the trust's shares are below its 100p issue price - at around 94p - would also be controversial. This is in contrast to last August and September when the trust issued 27 million shares via tap issues raising £30.46m, to satisfy excess demand when it was trading on a double-digit premium.
Some investors are disappointed in Woodford Patient Capital Trust, but this seems rather naïve and reminiscent of the rollercoaster of emotions following another 'star' manager launch. Fidelity China Special Situations (FCSS) raised £460m in 2010, making it one of the largest investment trust IPOs to date, and moved up to a premium to NAV due to enthusiasm to buy into its 'star' manager Anthony Bolton. But when this trust similarly didn't deliver millions overnight and some of its US listed holdings encountered problems, it moved out to a discount. However, towards the end of Mr Bolton's tenure in 2013, about three and a half years since launch, this trust's performance had improved.
These examples raise a couple of important points.
Firstly the likes of Woodford, Bolton, etc may be 'stars' but at the end of the day they are fund mangers not magicians, and won't get it right all of the time.
Secondly and more important, Woodford Patient Capital Trust and Fidelity China Special Situations invest in high-risk, potentially volatile assets that may offer strong returns over the long-term, but are unlikley to get there without considerable volatility along the way. Don't expect magic after only one year.
Mr Woodford says of the unquoted holdings: "It may take several years for these businesses (and indeed many of their quoted counterparts) to fully realise their potential... The realisation of future long-term value will be determined by the fundamental progress made by the companies in which we have invested, not by market sentiment."
Fidelity China Special Situations, meanwhile, is focused on China - an emerging market. The rationale for investing in developing economies such as China is that as these markets develop over the next five, 10, 20 or more years investors could experience strong returns. To expect an overnight result from these or early-stage companies is naïve.
These kinds of assets are not suitable for someone who needs access to their cash after a year. Over such a timescale cash is the only appropriate asset. Investment trusts such as Woodford Patient Capital and Fidelity China Special Situations require a time horizon of at the very least five years, but if you really want to see things come to fruition then maybe 10 or more.
This is not a defence of poor performance by Woodford, Bolton, Bolton's successor or any other fund manager. If Woodford Patient Capital Trust had delivered a cracking set of maiden results, and investors and the market were shouting its praises (a bit like when it did its IPO last year), I would equally label them naïve. There is no way you can know after one year how an investment focused on unlisted private equity and early-stage small companies is going to turn out - either way.
If you don't have a long time horizon and a very high-risk appetite don't go putting your money into something wholly inappropriate - star manager or no star manager.
If you hold shares in Woodford Patient Capital and realise you actually don't have the risk appetite for this kind of thing - unless you desperately need some money immediately - wait until they move to a higher price than you paid for them, before selling and switching into something more appropriate.
Otherwise don't panic and sell out at what is hopefully a low point in a long history. Small and early-stage companies, in particular unquoted ones, could take years to come to fruition. Be patient.
