Performance since launch

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Woodford Patient Capital Trust plc

The Woodford Patient Capital Trust was launched in April 2015, to take advantage of what we believe to be a very attractive opportunity investing in early-stage science-based businesses, primarily in the UK. We have been clear with investors from the start that, although we view this as a compelling investment case, it does represent a relatively high-risk proposition because the young businesses that the trust invests in have a different risk profile to more mature companies. The rewards for success are high but some of the businesses we back will inevitably fail to fulfil their potential. Those that do fulfil their potential may take years to do so, which means investors should treat this as a long-term investment vehicle.

We believe it is important that investors understand the drivers of performance, which we explain below.

Stock specifics

By its nature, the trust’s performance will be influenced to a greater degree by developments at the companies in which it is invested, than by macroeconomic or broader stock market considerations. Returns thus far have been dominated by a handful of stocks, some positive, some negative.

It is also the nature of the investing in earlier-stage, higher-risk businesses, that not all investments made will develop in the direction initially envisaged. Many things are beyond our control, and beyond the control of the companies in which we have invested. There will always be things that don’t go to plan within a portfolio like this, but with an appropriate balance of patience, support and determination, there is usually a path forward.

Examples of this among the negative contributors listed below include Prothena and Circassia – you can read more about these and many other companies by clicking on the company names, for a contemporary view of the investment case, with the context of its history.

There are, of course, also several holdings which have provided a meaningfully positive contribution to performance, including Autolus, Industrial Heat and Proton Partners International. The negative developments tended to come earlier in the trust’s life, whereas the positive developments have been more recent, which we believe bodes well for the future, as the businesses we have backed continue to mature and deliver on the commercial potential we have seen in them.

Top five performance contributors

Company Average
weight (%)
Performance
contribution (%)
Autolus 4.9 12.2
Industrial Heat 3.5 8.6
Proton Partners International 5.3 4.3
Purplebricks 5.5 2.8
Oxford Nanopore 8.0 1.9

Bottom five performance contributors

Company Average
weight (%)
Performance
contribution (%)
Prothena 10.2 -7.1
4D Pharma 1.6 -3.6
Circassia 0.8 -3.1
Allied Minds 1.3 -2.7
RM2 International 0.7 -2.6

Source: Northern Trust on a total return basis over the three years to 31 March 2019

Performance contributions are calculated on a total return basis, including the impact of intra-period trading, gross of fees in sterling using closing prices. Contribution totals may therefore not match fund performance data from other data sources which may be based on midday prices, net of fees. Values do not always sum due to rounding.

Market backdrop

Although equity markets have generally performed well since the trust’s launch, the investment backdrop has been less supportive for the type of investments that the trust has invested in. Conditions have been increasingly momentum-driven, with returns driven by a narrow band of popular stocks, with much of the rest of the market being left behind. For example, sentiment towards the biotechnology industry has been negative for much of this period, and the investment environment has also been challenging for the share prices of early-stage businesses more broadly.

Multi-year bear market in healthcare leaves stocks cheaper than they have been in decades

Source: Bloomberg, Woodford

This is best illustrated by the contrasting fortunes of the quoted and unquoted elements of the portfolio. For example, in 2018, 20 unquoted holdings were revalued upwards, with 16 positions revalued downwards and 18 unchanged. This is broadly consistent with the operational progress that we have witnessed from the portfolio – not everything has progressed as we anticipated, but we’ve seen more positive developments than negative.

This pattern, was not replicated among the quoted stocks, however. The operational performance of the quoted portfolio was broadly similar to that of the unquoted element. It was by no means all positive, but collectively, we have seen many more operational steps forward than steps back from the quoted businesses.

The share price performance of the quoted portfolio, however, was starkly different in 2018. This is not a reflection of what has happened to the listed businesses in which we have invested. Primarily, the decline in share prices across the portfolio of quoted businesses offers further evidence of the market’s aversion to early-stage investment opportunities in the current environment.

Importantly, in most instances, the share price behaviour we have seen is not linked to a deterioration in individual company fundamentals. Considerable progress has been made across much of the portfolio, which isn’t yet reflected in share prices or valuations.

There are many examples of companies in the portfolio that have made meaningful progress on the road to commercialisation. Several have overcome significant challenges to get where they are today. Patience has been required to get to this stage and it remains a prerequisite for investing in this part of the asset class. We remain confident in the long-term investment opportunity and we are doing everything that we can to ensure positive outcomes for the companies in which the trust has invested.

Trust performance

As at 30 April 2019

Performance

Source: Financial Express, Woodford, on a capital return basis

Performance summary
  1 month 3 months Year-to-date 1 year 3 years Since launch
(20/04/2015)
Net asset value -0.08 0.66 -0.95 17.72 4.45 -3.32
Ordinary share price 4.67 -3.49 0.97 9.08 -16.98 -17.10
Standardised performance (%)
  01/04/14
to 31/03/15
01/04/15
to 31/03/16
01/04/16
to 31/03/17
01/04/17
to 31/03/18
01/04/18
to 31/03/19
Net asset value - - 7.07 -10.36 10.70
Ordinary share price - - -3.03 -11.64 -1.61

Past performance cannot be relied upon as a guide to future performance.
Source: Financial Express on a total return basis, with net income reinvested.

What are the risks?

  • Long-term outcomes are more binary – extremely attractive rewards for success but some businesses will inevitably fail to fulfil their potential and this may expose investors to the risk of capital losses
  • As it can take years for young businesses to fulfil their potential, this investment requires patience
  • The value of the trust as well as any income it pays will fluctuate which may partly be the result of exchange rate changes
  • The price of shares in the trust is determined by market supply and demand, and this may be different to the net asset value of the trust. This means the price may be volatile in response to changes in demand
  • The trust may invest in overseas securities and be exposed to currencies other than pound sterling – as a result, exchange rate movements may cause the sterling value of investments to decrease or increase
  • The trust may invest in unquoted securities, which may be less liquid and more difficult to value, because they are generally not publicly traded – the lack of an open market may also make it more difficult to establish fair value
  • Young businesses have a different risk profile to mature blue-chip companies – risks are much more stock-specific, which implies a lower correlation with equity markets and the wider economy

Important information

We do not give investment advice so you need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser. The trust currently intends to conduct its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the FCA’s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the FCA’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust.

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

© 2019 Woodford Investment Management Ltd.
All rights reserved.

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