I am making a little more progress with
the transition of my portfolio from income to growth. Today, I have added
Woodford Patient Capital trust to my portfolio as a replacement for City
Merchants High Yield trust.
WPCT provides financing for
early-stage businesses that seek to turn innovative new products into a
commercial success. It is a unique investment trust that, as the name suggests,
requires a long-term outlook.
The trust raised £800m when launched in
April 2015 however it has been a bit of a rollercoaster ride for investors. There
have been some significant setbacks within the portfolio to date, notably
investments in Allied Minds, Circassia and Northwest Biotherapeutics.
Overcoming setbacks is part and parcel of investing in early stage companies
and any portfolio, whether investing in large or higher-risk smaller companies,
will have winners and losers.
The bulk of the trust remains invested in ‘early-stage’ and
‘early-growth’ companies many of which are not listed on a stock market. These
tend to be highly innovative companies developing new products and services
that have the potential to change entire industries, many of which feature in
the healthcare sector. Obviously not all of them will succeed.
However, Neil Woodford is reported as saying, in the teeth of
such disappointments, that the trust has stakes in several companies that could
be worth billions of dollars each in the next five years. On the basis of that
potential, and assuming that the trust sticks with its original investments
without taking any more punts on jam-tomorrow stocks, I think the lower share
price currently makes it more attractive.
Last week the shares received a boost
from a reassessment of the value of cold fusion specialist Industrial Heat. Woodford
says it funded this company 'to engage credible world-leading institutions
rigorously to assess the claims of research groups in the field'. Growing
interest in the business has enabled it to raise money from other investors
prompting a substantial increase in its value.
Industrial Heat is now worth
US$112.9mln according to Woodford's alternative fund manager Link, or a 357%
rise compared to its previous valuation. That translated into an 8p uplift
in the net asset value of Woodford Patient Capital Trust.
Earlier this year the trust
received a valuation boost from the US stock market flotation of Autolus
Therapeutics, which is currently its largest holding.
The value of its stake in Autolus
jumped by 51% as a result of the IPO (initial public offering) being priced at
a higher level than the current book value of its investment. In turn, that
provides 3.8% uplift to the net asset value of WPCT.
This is the type of outcome which
vindicates Woodford’s approach of finding businesses with ‘outstanding
intellectual property’, helping them grow with financial support, and then
reaping the rewards with exceptional long-term returns.
Top Holdings
The Company is invested in five
companies that are valued at more than $1 bn Autolus, Purplebricks,
Oxford Nanopore, Benevolent AI and Immunocore. Some of the largest holdings
are related to healthcare.
The
largest is Autolus which listed on Nasdaq in June and accounts for 11% of the portfolio. It has developed a therapy
which extracts white blood cells, modifies them to target cancer and reinjects
them. Its related therapies are currently going through stage one and two
trials, but similar methods have already passed phase three trials in
competitor companies, which gives Neil a high degree of confidence the treatments
will be validated. The trust is retaining its holding despite the gains on
flotation, hoping there is much more is to come from the stock.
Benevolent
AI, a 9.5% position, uses artificial intelligence techniques to generate ideas
for treatments for disease. The technology finds associations and similarities
across research papers, potentially generating ideas for new drugs which human
researchers might lack the perspective to find. It is also developing further uses
for its technology outside of healthcare. Earlier this year the company raised
$115m from new investors which valued the company at £2bn.
Oxford
Nanopore, 8% of the trust, produces handheld gene sequencers. Its main
customers at the moment are in the University, but it is keen to develop new
markets and uses for its tech. It is not the only player in the field, but it
does have advantages over its largest rival Illumina, both in the handheld
nature of its product and in the more efficient way it builds a genome up from
larger building blocks.
Charges
The trust also does not levy an annual management fee. However they will
levy a hefty 15% performance fee when the trust can deliver on its promise of
10% annual NAV return. Woodford Investment Management has not yet taken any
performance fees from the trust, and has some way to go before it does. The
management’s incentives are therefore well aligned with the interests of
shareholders.
The trust has around 90 holdings - split two-thirds unlisted and
one-third listed. It recently reported half-year results to end June 2018 (link
via Investegate)
At the time of this post, the net assets of the trust are estimated
close to 100p however the share price lags behind at 85p which gives me a
discount of 15% .
The purchase is speculative and no more than a punt on the talent and
judgment of Neil Woodford to deliver the goods he has set out to achieve. The
initial purchase is quite modest and represents less than 2% of my portfolio.
As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!