Woodford Patient Capital placed 'under review'

The Money Observer Rated Fund was selected as a 'wild card' choice at the start of 2018, but in light of recent events Woodford Patient Capital has been placed 'under review'. We explain why.

Following the suspension earlier this week of the Woodford Equity Income fund, the Money Observer Rated Investment Team has moved to put Woodford Patient Capital Trust (LSE:WPCT), a Rated Fund since the start of 2018, under review.

While the trust still continues to trade as normal, its share price has come under pressure since Woodford Equity Income decided to temporarily close its doors. WPCT's share price stood at 77.5 pence per share prior to the announcement (at close of trading on 3 June) and has since fallen to 70.2 pence per share, as at 10am on 5 June. Its discount has also widened, from 14% to 20%.

Our concern is the potential negative impact the suspension of Woodford Equity Income will have on WPCT, given that there is a large overlap of holdings. Winterflood, the broker, estimates that at the end of April companies representing 74% of WPCT's portfolio value were also held in Woodford Equity Income.

The broker adds that as Neil Woodford restructures Woodford Equity Income during the suspension period, which will last for up to 28 days before being reviewed, "we believe there is the potential for share prices/valuations of its holdings to come under pressure".

In addition, Woodford Equity Income owns 9% of WPCT, following a share swap earlier this year. As Winterflood notes, for WPCT the "negative sentiment surrounding the suspending of dealing" in Woodford Equity Income "could be exacerbated" if Woodford Equity Income decides to sell its shares in WPCT.

In light of these concerns, which are also shared by the Money Observer Investment Team, we believe it is prudent to place the trust 'under review' within our Rated Funds list. WPCT was first given Rated Fund status in 2018 as a 'wildcard choice' for contrarian investors with an appetite for risk. This was largely due to its discount widening to in excess of 10%, representing a bargain for investors with conviction in Woodford's abilities.

It has been a poor performer since launch, down 29% since it listed in May 2015, but prior to the suspension of Woodford Equity Income various professional investors had lately been upping their exposure to WPCT.

In order to boost liquidity, which will in turn make it easier for the fund to meet investor redemptions, Woodford informed investors in a video published yesterday evening that he will be seeking to reduce "down to zero" the exposure to the unquoted and unlisted stocks held in Woodford Equity Income.

He added:

"The suspension of dealing in the fund gives us the time and space to execute that strategy, reduce our exposure and redeploy that capital into more liquid stocks in the FTSE 350, but primarily in the FTSE 100."

Woodford apologised for suspending dealing in the fund, but stressed the move was made in investors' best interests. He added: "We understand our investors' frustration. All I can say in response is that this decision was motivated by your interests, our investors. When it is appropriate we will reopen the fund so you can buy and sell as normal.

"As a result of increased level of redemptions we were seeing, the stock market was anticipating that we would have to be sellers of stocks. We felt that the prices we would be able to achieve in order to meet those redemptions would be disadvantageous for our investors."

In due course the Money Observer Investment Team will take a decision on whether WPCT remains an appropriate investment for the Money Observer Rated Fund list.

This is not a recommendation to sell WPCT.  It is instead part of our ongoing due diligence and reflects the robust process that applies to all funds on the Rated list. Money Observer wants to ensure that all investments on the list remain appropriate. 

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