Woodford Patient Capital offers high growth at a discount

For investors with a long-term time horizon and a very high risk appetite, looking for exposure to innovative early growth and early-stage companies, this could be an attractive entry point.

Woodford Patient Capital Trust invests in young, mostly UK, businesses, a large proportion of which are unquoted. These types of investment can be very profitable if they develop and grow well, but this process takes a long time - at least five to 10 years - hence the trust's name. It would be unrealistic to expect such investments to mature and prosper over the two years since Woodford Patient Capital Trust's launch.

"A lot of people who bought this trust have not been as patient as they should have been," says Mick Gilligan, head of fund research at Killik. "In many ways, this trust is effectively a venture capital portfolio. And what you'll tend to see in the early stages are the lemons - companies that don't work - come out first. Funding costs [for early-stage companies] are also quite heavy. But in time it should translate into returns that surge upwards."

Woodford Patient Capital Trust's widening discount reflects a wave of investors selling the trust on the back of poor short-term returns. But if its early-stage investments succeed then the discount could tighten and even return to a premium.

It also has an ongoing charge of just 0.19 per cent, which is very low for any active fund, and far lower than the charges you get on private equity investment trusts or venture capital trusts (VCTs), which also offer exposure to potentially high-growth unquoted investments. Woodford Patient Capital Trust's charges are low because they only cover the administrative costs of running the trust and no profit margin is added on.

Its manager will not receive a performance fee unless the trust achieves its objective of delivering a return in excess of 10 per cent a year over the longer term. The performance fee would be equal to 15 per cent of the outperformance of NAV total return.

"The costs are very attractive," says Mr Gilligan. "If this trust does well the performance fee could be quite high, but as things stand at the moment you are paying a maintenance cost."

The trust's manager, Neil Woodford, has a very successful long-term track record with funds focused on listed UK equities, such as Invesco Perpetual Income (GB00BJ04HX60) and High Income (GB00BJ04HQ93). But he has never run a fund with such a high allocation to private equity.

Over one year, Woodford Patient Capital Trust trust has lost 6 per cent, in contrast to a gain of 24 per cent for the FTSE All-Share index. It is also highly concentrated, with healthcare and financials accounting for over 95 per cent of its assets - and there is no guarantee its early-stage investments will succeed.

But Mr Woodford has invested in small and unquoted companies for years, even though they did not account for such a large part of the other funds he has run. He has also been successful in making sector calls.

Short-term returns, meanwhile, are not an indication of what a fund focused on smaller and unquoted companies might achieve over the long term - the timescale such investments need to come to fruition.

So, if you are prepared to invest for five years or preferably longer, Woodford Patient Capital offers a high-risk but potentially high-return opportunity with one of the UK's most successful fund managers - and at the moment can be bought at what may prove to be a relatively wide discount to NAV. Buy. EA

Woodford Patient Capital Trust (WPCT)

Source: Winterflood Securities as at 30/05/17, *Woodford as at 30/04/17

Performance

Source: Winterflood Securities as at 30/05/17

Top 10 holdings as at 30/04/17 (%)

Source: Woodford Investment Management

Sector breakdown as at 30/04/17 (%)

Source: Woodford Investment Management

IC TIP RATING

Tip style: GROWTH

Risk rating: HIGH

Timescale: LONG TERM