Ex-Woodford investment trust proposes continuation vote in 2025

If performance does not improve, the future of the investment trust is in doubt, an analyst has warned. 

The board of Schroder UK Public Private Trust (LSE:SUPP), formerly known as Woodford Patient Capital, has proposed to tweak its rules to allow a continuation vote to take place in two years’ time.

In next month’s annual general meeting, its shareholders are being asked to approve a change to the company’s articles to introduce a vote in 2025 on whether the investment trust should continue in its present form. If shareholders vote in favour of continuing, the same vote will take place every five years.

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Continuation votes are a permanent feature for some trusts, occurring once a year or over longer periods, such as three or five years.

In other cases, a continuation vote is triggered if a trust persistently performs poorly, or has traded on a wide discount for long periods. A continuation vote can also be called by disgruntled shareholders.

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In the case of Schroder UK Public Private, the proposed continuation vote will give shareholders the opportunity to review the performance of the fund managers more than five years on from taking over the troubled trust in the wake of the collapse of Woodford Investment Management.

Tim Edwards, chair of Schroder Public Private, said: “The directors consider (five years) to be an appropriate time frame for the investment team to have repositioned the portfolio, including having made a number of new investments against which its performance can be assessed.”

In other news, it was announced that co-manager Roger Doig has stepped down from the investment team. He has been replaced by Harry Raikes, who will work alongside Tim Creed, who has managed the trust since Schroders took over the mandate. In a previous role, Raikes worked as an investment analyst at Woodford Investment Management.  

The trust, which holds £275 million of assets, invests in early stage global companies following a mandate change last year. Previously, it just held UK firms. It invests in listed and unlisted stocks, but most of the exposure is to unlisted companies. Of its 20 largest investments, which account for 93.4% of the portfolio, 14 are unlisted stocks.

To reflect the global remit, the board is taking steps to change its name to Schroders Capital Global Innovation Trust.  

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Under Schroders’ management performance has not turned around. Over three years, figures from Morningstar show that the share price total return is a loss of 45.5%, while the performance of its underlying investments – the net asset value (NAV) – is down 39.1%. Over the same time period, other growth capital-focused trusts have seen their share prices suffer to a similar extent (-37.8%), but NAVs have held up better (-6%), for the sector average.

In its latest financial year – to the end of 2022 – the trust reported an NAV decline of 40.7%.

A tightening in monetary policy has been an unfavourable backdrop for trusts investing in unlisted companies. There are concerns among investors that falls in listed markets are putting downward pressure on valuations for unlisted companies. 

However, some investment trust analysts argue that too much bad news has been priced in, and that the value of unlisted investments is holding up better than some investors fear.   

Private company valuations are set behind closed doors, rather than decided constantly by a large pool of investors, as in public stock markets. 

Addressing performance, Edwards said that “while the portfolio progress over the last three years has been positive, the NAV has fallen as the company continues to work through the issues in the legacy portfolio, which has been made more challenging with the change in the environment for growth capital investing”.

At the time of Schroders’ appointment investment trust analysts cautioned that there would be “no quick fix”.

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Alan Brierley, an analyst at Investec Securities, said Schroders had a challenge on its hands as it had inherited “a highly geared, highly illiquid and concentrated portfolio, predominantly consisting of venture capital investments”.

Commenting on the proposed continuation vote in two years’ time, Numis analyst Gavin Todd said that performance needs to improve for shareholders to give the trust the green light to carry on.

Todd said: “If performance does not markedly improve over this period, we believe that the fund's future may well be in doubt.”

Edwards concluded by saying: “Although 2022 was disappointing for the company, the manager has continued to diversify the portfolio and the board believes that the global remit, adopted in 2022, enables access to the best innovation ideas in the most promising themes, wherever they are in the world.

“The pivot towards private investments, which has taken longer than anticipated due to the uncertainty of private markets in 2022, is expected to make further progress in 2023.”

The current discount is 53.4%. This discount may be helped by the fact that the board intends to use 25% of all net cash realisations from the portfolio inherited from Woodford Investment Management for share buybacks between now and 2025.