Investors told to sell Woodford Patient Capital

Stifel Funds has launched its coverage of the new Woodford Patient Capital Trust - with a resounding 'sell' recommendation.

Investment company analysts Iain Scouller and Maarten Freeriks point out that shares in the £920 million trust are trading at a heady premium of 13% to net asset value (NAV) after the share price shot up post-launch in April. Given the long-term strategy employed by the managers, it warns that this could be an example of "a patient strategy with an impatient price".

Part of the growth in share price - which rose from 105p to 116p in the past three weeks alone - could be attributed to the trust entering the FTSE 250 index and therefore being picked up by relevant tracker funds which automatically buy shares of companies within a given benchmark. However that compares with a much lower estimated NAV of 103.1p.

Expensive

"With the fund having only been launched two months ago, these are extremely early days in the life of the portfolio," Stifel says in a report to investors.

"Normally, in these circumstances, we would wait some time before initiating coverage. However, given the elevated premium and the technical index factor, which appears to have created demand for the shares, we think it is worth highlighting the expensive nature of the shares to investors at this early stage."

The report goes on to say Woodford Patient Capital's soaring share price may partially be the result of "fashion following", similar to what was seen with the launch of Anthony Bolton's Fidelity China Special Situations investment trust in 2010. Shares in Bolton's trust also traded at a big premium after launch, only to fall to a sizeable discount to NAV subsequently.

As the trust's prospectus pointed out at launch, it will take time for the portfolio to be fully invested, particularly the unquoted portion. Stifel's analysts are concerned that this could take longer than anticipated, highlighting that the £800 million raised at launch was four times the "targeted £200 million".

"The unquoted element of the portfolio is likely to take some years to fully mature, and we don't think this is being properly reflected in the current high share price," they add.

It is not unusual for popular trusts to trade at high premiums, particularly income-focused vehicles in the infrastructure, property and equity income space. But Stifel points out that Patient Capital is "all about capital growth in the long term" and adds "excessive premia can be as big a problem as excessive discounts and can lead to unwanted volatility in share prices".

Could be a bargain

But Adrian Lowcock, head of investing at Axa Wealth, says investors might not want to sell too hurriedly.

"The Woodford Patient Capital Trust has benefited from Woodford's reputation and impressive long term track record. It is hard to see this 'Woodford premium' being eroded completely as he is arguably the most well-known manager in the UK and has a strong following. However, the premium is significant, particularly when compared to other smaller company investment trusts many of which currently trade at discounts to net asset value. At this level new investors might want to consider alternatives.

"Investors should balance their long term objectives and expectations for the trust against the short term profit which they could make before deciding on the best course of action. It is possible that the net asset value of the trust will rise closer to the current share price and effectively eliminate the premium. If this happened investors selling out not may not find an opportunity to get back in at a lower price. Given this trust was aimed at long term investors I don't expect many to cash in now for a small short term profit."

Lowcock concedes that a lot of at-launch investors might have "stagged" the trust soon after launch - in other words buying shares in the anticipation of a hot initial rise, only to sell for a quick profit. But given the focus on start-up companies, he adds that a 13% premium now might be a paltry return if one of the portfolio's fledgling investments takes off.

However the company has not yet announced details of its invested portfolio, which could come to represent 60% of the portfolio in time.

Scouller and Freeriks acknowledge that Patient Capital's strong management team offers "something different" - exposure to blue-chips alongside early-stage and potentially high-growth companies - and a fee structure that is strictly aligned with positive performance.

In its valuation of the trust's shares, Stifel also acknowledges "Neil Woodford's good long-term track record and the associated marketing machine", but points out that investment companies in the listed private equity sector trade at an average 15% discount to NAV.

Coupled with the current immature state of the trust's portfolio, Stifel reckons a fair valuation for shares in Woodford Patient Capital is closer to its NAV of 103p, rather than the 116p at which it currently trades.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.