Analysts have welcomed the appointment of a new investment manager for Woodford Patient Capital Trust (WPCT), but warn that the fund still faces significant challenges.
Schroder Investment Management is expected to take over the beleaguered portfolio by the end of this year. The board of the investment trust, which was mired in uncertainty when Neil Woodford resigned as portfolio manager in October, said Schroders would run its portfolio in line with the existing investment objective and policy, focusing on both listed and unlisted UK equities.
The WPCT board said Schroders had a “highly specialised” private equity division, with 20 years of experience managing $9.8bn of assets globally. Schroders’ private equity team employs more than 100 people around the world.
Shares in the trust, which will be renamed Schroder UK Public Private Trust and run using a team approach, made significant gains in the wake of the board’s announcement.
The appointment is good news for investors in the short term. If the board had instead opted to wind up the trust, an investment manager might struggle to sell the holdings it has in common with the closing LF Woodford Equity Income (GB00BLRZQB71) fund at a decent price. Some have argued that this, and the fundamental appeal of WPCT’s approach, should make it one to consider in future.
Winterflood research analyst Simon Elliott, who described Schroders’ appointment as a “second chance”, said: “Despite the evidence of the past four-and-a-half years, we believe the fund’s mandate continues to have validity. In our opinion, the provision of long-term financing to predominantly UK companies, both private and publicly listed, at an early stage of their existence should generate attractive returns for investors.”
The trust’s shares continue to trade at a hefty discount to the value of the underlying assets. But investors considering buying cheap should also be aware of the challenges at hand.
Investec analyst Alan Brierley warned that Schroders will inherit a highly concentrated portfolio with significant levels of debt and limited liquidity. As such, portfolio changes will be difficult to enact and any strong performance will rely on a small number of stocks. Mr Brierley added that the trust’s share price could prove highly volatile in future, given many of its shares are owned by private investors rather than professionals who might have a longer-term view. LF Woodford Equity Income's position in WPCT shares could create additional issues by driving down its share price.
Meanwhile, if Schroders' team wishes to reposition the portfolio by selling holdings shared with LF Woodford Equity Income, this will be difficult in the foreseeable future due to the current wind-down and its effect on prices.
Investors should also consider changes planned for the trust’s charging structure. Under Neil Woodford, the trust charged a nominal ongoing annual expenses charge, listed as 0.23 per cent at the end of August. Mr Woodford was also entitled to charge a performance fee amounting to 15 per cent of any excess returns over a cumulative hurdle of 10 per cent a year. As the portfolio never reached this hurdle, the performance fee was never charged.
Schroders will not take a fee for three months, but after that it will charge a yearly fee of 1 per cent on the trust’s market capitalisation up to £600m, with a 0.8 per cent charge on assets above that level. From the end of 2022 Schroders will also be eligible for a fee of 15 per cent on any excess returns above a net asset value (NAV) per share of 77p. Once this threshold is reached, a performance fee of 15 per cent of any returns above a hurdle of 10 per cent of net assets each year will apply, subject to certain conditions.
Most analysts have accepted this charging structure. Numis analysts said the fact a performance fee would not be charged until the trust’s NAV reached 77p implied Schroders had “confidence” in the current valuations of the trust’s investments. They added that this structure aligned the interests of the portfolio manager with those of shareholders.
However, Stifel's Iain Scouller warned that charging performance fees on an annual basis could be “storing up issues for a later date”, because the natural lifecycle of the investments involved tends to be between three and five years.
