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LF Woodford Equity Income swaps unquoteds for Woodford Patient Capital

LF Woodford Equity Income has reduced its exposure to unquoted companies
March 7, 2019

High-profile manager Neil Woodford has sold five of LF Woodford Equity Income Fund's (GB00BLRZQB71) unquoted holdings, with a value of £72.9m, to Woodford Patient Capital Trust (WPCT) in exchange for shares in the trust worth 9 per cent of its market cap. The trust now accounts for 1.45 per cent of LF Woodford Equity Income's assets.

LF Woodford Equity Income's exposure to unquoted companies has fallen from around 9 per cent to under 8 per cent of its assets, and Mr Woodford plans to reduce this further as these companies reach a more mature stage of their growth cycle. He will do this by transferring more capital to Woodford Patient Capital Trust and through corporate events such as initial public offerings and takeovers.

The fund's allocation to unquoted companies was close to the regulatory limit of 10 per cent of its assets. The exposure to unquoted companies has grown because they have been doing well, and their valuations have increased at the same time as some of the fund's quoted equity holdings' prices have decreased. Investors have also withdrawn significant amounts of money from the fund and Mr Woodford has primarily met these redemptions by selling quoted equity holdings, reducing the proportion of the fund they account for. 

Woodford Investment Management said it swapped some of the unquoted holdings for a stake in Woodford Patient Capital because investors have said they want less exposure to illiquid assets. The five companies that have been sold are Atom Bank, Carrick Therapeutics, Cell Medica, RateSetter and Spin Memory. These were already held by Woodford Patient Capital so it has increased its allocation to them. 

But reducing the exposure to unquoted companies could be detrimental to LF Woodford Equity Income's returns. Its unquoted portfolio accounted for 40 per cent of the 15 per cent total return the fund delivered between June 2014 and February 2019. Woodford Patient Capital’s share price, by contrast, is down 20.3 per cent since launch in April 2015, and it is trading at a discount to net asset value (NAV) of about 14.5 per cent. But it has issued the shares acquired by LF Woodford Equity Income at NAV rather than a discount, so it doesn't dilute the holdings of existing shareholders.

Woodford Patient Capital could benefit as LF Woodford Equity Income will be a long-term shareholder. And LF Woodford Equity Income may further increase its stake in the trust by buying shares on the secondary market, which could boost the share price and narrow the discount.

Adrian Lowcock, head of personal finance at Willis Owen, said reducing the exposure to unquoted companies in LF Woodford Equity Income should provide greater clarity for investors. It also reduces the possibility of liquidity problems open-ended funds can face when they hold unquoted investments.

But he added: “If you like Neil Woodford it would now be better to split your exposure between LF Woodford Income Focus Fund (GB00BD9X7109) and Woodford Patient Capital, rather than pay Woodford to do it for you within LF Woodford Equity Income.”

LF Woodford Income Focus Fund aims to deliver a higher level of regular and sustainable income than LF Woodford Equity Income, though has some holdings in common with it. But it has never had any exposure to unquoted holdings. 

Woodford Investment Management said there are differences between these three funds. Woodford Patient Capital provides exposure to early-stage companies, LF Woodford Equity Income targets a total return via a combination of UK, non-UK and unlisted securities, and LF Woodford Income Focus provides a high income by investing in UK-listed stocks.

The performance of these funds has not been good recently partly due to their allocation to stocks exposed to the UK domestic economy, which have been unpopular with other investors and experienced share price falls. There have also been some problems with individual shares to which the funds had a high weighting, such as Capita (CPI).

Between its launch on 19 June 2014 and 31 January 2019, LF Woodford Equity Income has returned 12.31 per cent, versus 24.35 per cent for the FTSE All-Share index and the Investment Association UK All Companies sector average of 24.11 per cent.