Putting Schroder UK Public Private to the test

Let’s spare a thought for the humble investment trust shareholder in this busiest of times. A raft of initial public offerings (IPOs) and placings have helped trusts raise £14.3bn in the first 11 months of 2021, the highest amount in 13 years. Add to that a flurry of mergers, closures and overhauls and the average devotee of closed-ended funds has had more than enough news to digest.

This barrage of information partly explains the thinking behind our newly launched series. In a bid to cut through some of the noise, each month we will single out a topical trust for in-depth analysis. This could be a fund on the cusp of an IPO or a major secondary fundraising, a stalwart facing an overhaul, or a name trading at either end of the extreme valuations that have become commonplace in certain sectors. Readers who are interested in a particular trust or sector can contact the funds editor by emailing david.baxter@ft.com.

Let’s start with Woodford

In the hunt for a particularly topical fund with which to begin the series, we have landed on a vehicle perhaps better known by its original name. It has been more than two years since Schroders took the reins at what is now called Schroder UK Public Private Trust (SUPP), but for some investors it will always be the former Woodford Patient Capital Trust. As outlined in an IC podcast in the summer, that difficult legacy is reflected in the composition of the portfolio and the management team’s focus on both improving the quality of the inherited holdings and delivering incremental change, rather than tearing things up and starting over.

Woodford holders have clearly suffered more than their fair share of bitter disappointment, courtesy of this trust as well as the manager’s old open-ended funds. But Schroder UK Public Private has offered some cause for hope this year. As of 9 December, shareholders looked set to end a volatile 2021 with a modest positive return – the first time they would have ended a calendar year in the black over the trust’s six-and-a-bit-year history. Under the bonnet lies a much healthier net asset value (NAV) performance, with the portfolio’s value up by more than 35 per cent from the start of the year to 9 December.

As this dynamic suggests, the shares have moved to a much wider discount to NAV than at the turn of the year. At the time of writing this came to more than 30 per cent. That will be of interest to both bargain hunters eyeing up the substantial discount, and former Woodford loyalists deciding whether to stick with the portfolio or get out at the most lucrative moment. And needless to say, it's worth exploring the reasons behind this shift.

A bang…and then a whimper

In a nod to one of Woodford’s more successful calls of recent years, Schroder UK Public Private has acted as a play on one of the IPOs of 2021. Oxford Nanopore Technologies (ONT), a gene sequencing specialist and a rare case of a biotech firm floating in London, has seen its shares soar since listing at the end of September.

As the trust’s biggest holding, Oxford Nanopore has been almost entirely responsible for the recent surge in the portfolio’s NAV. The value of the portfolio jumped by almost 16 per cent in the third quarter of this year, and 94 per cent of the gains came from that one name.

Besides buoying the NAV performance, a third-quarter update released at the end of November by the trust has pointed to a couple of other happy consequences of this IPO. The trust's managers noted that the flotation has resulted in a “significant improvement in the portfolio’s overall liquidity profile”, with the listed holdings increasing to 50.6 per cent of its value. This figure excludes the listed but illiquid Rutherford Health (RUTH), which is priced using a fair-value method applied by the trust's alternative investment fund manager.

A partial sale of the Oxford Nanopore stake has also provided net proceeds of £10.6m, which combined with funds from the sale of Inivata enabled “further acceleration of the portfolio rebalancing”. The trust made new investments in Spirent Communications (SPT), alternative investments specialist Petershill Partners (PHLL) and unlisted market research technology platform Attest Technologies.

Since then the trust has also invested in unquoted Ada Health, a “powerful artificial intelligence-based health assessment and care navigation platform that helps users to understand their symptoms, to identify and differentiate conditions with a high degree of medical accuracy, and to navigate safely to the right care, at the right time”.

Such progress has been a long time coming for shareholders in a trust that once seemed almost constantly dogged by scandal related to its former namesake. This makes the fact that the share price discount has widened further since the Oxford Nanopore IPO all the more unusual.

Out of favour for a reason?

We can devise all manner of theories to explain why the trust’s shares have moved to an even wider discount following such a big win. To pluck one from the Investors’ Chronicle stable, our Alpha service recently suggested that some of the widening “may reflect scepticism about whether the febrile state of the market will last until the trust is free to start realising some of its big paper gains” on Oxford Nanopore. While the trust sold 10 per cent of its stake (the maximum allowed) at IPO, it must wait half a year before offloading any more.

The widening could also relate to broader worries that the trust’s best moment is now behind it, or even the fact that it again looks worryingly concentrated: Oxford Nanopore made up 34.2 per cent of its assets at the end of September.

We should also not forget that the nature of the shareholder base could hinder the share price at times of strong performance, given that disgruntled investors from the Woodford era may simply want an exit. Mick Gilligan, head of managed portfolio services at Killik & Co, notes: “It feels like a trust that has a lot of ‘stale bulls’ on the share register (investors who bought at much higher levels when things looked more optimistic and are now sellers into strength), as any short-term improvement in the price seems to be met with a tick up in selling.”

Investors have also had to swallow some more bad news. Rutherford Health, the third largest-holding in the portfolio, warned in a recently published half-year report that it expects to make losses in the current financial year despite growth in revenue. The company also highlighted a “material uncertainty” relating to future fundraising, adding that this could cast significant doubt on its ability to continue as a going concern. At the time of writing Rutherford had promised an update on its attempts to secure bridging finance in the coming days.

Johnson Matthey (JMAT), a recent public equity investment made by the Schroders team, has had its own problems. The company announced it was exiting its battery materials business in November, resulting in a £314m impairment. The shares have slumped since that point.

More generally, further bumps in the road might lie ahead. The trust’s own third-quarter update notes that investors “may see further headwinds in the portfolio inherited from the previous portfolio manager”. Some holdings continue to be loss-making and need further financing, although the Schroders team only intends to give more money to those with “an appropriate risk/reward profile”.

Certain analysts have taken a dim view of the portfolio’s prospects. Investec's Alan Brierley and Ben Newell downgraded the trust to a “sell” rating at the end of November, warning: “While Oxford Nanopore has been a spectacular success, the health of the remaining legacy is a concern”. They add that the performance of two new investments, in Johnson Matthey and Petershill Partners, has “done little to inspire confidence”, albeit only over a short period of time.

The portfolio certainly remains a work in progress, with the Schroders team still bidding to make it more balanced and diversified. Investors will likely view things differently depending on when they bought in. Jaded Woodford fans might be keener to throw in the towel than those who bought in opportunistically at a wide discount during some of the trust’s darkest moments. Some might even see an opportunity to get in now.

Whatever your situation, the trust’s original “patient capital” label couldn’t be more fitting. It is likely the trust could see better days, but if the situation does turn around it is unlikely to do so immediately.

Gilligan puts across an optimistic, but nuanced, view. “Although I do not see any short-term catalyst to narrow the discount, for the patient investor I think this should see better returns in time,” he explains. “The outlook for Oxford Nanopore is very bright and over time the new managers should be in a stronger position to put their mark on the portfolio.” Good things may yet come to those who wait.