We wanted to let you know that the LF Woodford Equity Income Fund (the fund) has transferred some of the portfolio’s individual unquoted stocks to Woodford Patient Capital Trust (the trust) in exchange for shares in the trust. This step signals the start of a strategy to switch the fund’s unquoted exposure from individual unquoted holdings to shares in the trust.
Which unquoted positions have moved across?
Atom Bank, Carrick Therapeutics, Cell Medica, RateSetter and Spin Memory have transferred from the fund to the trust. All of them are existing positions within the trust portfolio. The combined value of these assets is £72.9m. A further £6.0m in cash has also transferred from the fund to the trust, to meet the anticipated capital requirements of these assets over the next twelve months.
Why have you chosen these particular stocks?
We have selected from a list of positions in which the trust already has a holding, and have avoided stocks where we believe there is a known likelihood of an imminent milestone being reached that would trigger a near-term valuation change. Indeed, an additional valuation report was commissioned by the trust’s board which, as required under the Companies Act, independently verified the reasonableness of the valuations of the five stocks transferred.
Furthermore, several of the larger unquoted positions within the fund are also already well-represented within the trust portfolio. As these businesses are typically at a more mature stage of their growth cycle, other forms of corporate activity could arise in the short-to-medium term that would further reduce the fund’s aggregate exposure to unquoted securities. Evidence of this was provided yesterday by Proton Partners International, which has listed on London’s NEX Exchange Growth Market. The acquisition of the selected assets allows the trust to increase its position to companies that the board views as the “the second-wave of global disruptors”.
How has the transfer taken place?
The trust has acquired this portfolio of assets for £78.9m (including the cash element) through the issuance of 81,639,238 new ordinary shares. The shares have been issued to the fund at a price of 96.67 pence per share which is equal to the net asset value (NAV) per share as at 27 February 2019, plus the costs associated with the transaction.
In buying the shares at the trust’s NAV, the fund is buying its stake in the trust at a premium to the prevailing share price. We have explored how much it would cost the fund to purchase the equivalent position in the secondary market and our analysis suggests it would cost considerably more and take significantly longer, than buying at NAV in this way. The fund is paying what the trust’s assets are actually worth and we are doing this with the belief that the assets will significantly appreciate over the medium-to-long term.
Why have we transferred these unquoted holdings?
This step signals the start of a strategy to switch the fund’s unquoted exposure from individual unquoted holdings to shares in the trust. Neil is as passionate on the unquoted asset class as ever but having listened to feedback from clients we believe that moving the exposure to the asset class via a collective fund rather than individual unquoted stocks makes sense – both operationally and from an investor view.
Furthermore, in making this move, which coincides with the LF Woodford Income Focus Fund moving from the IA Specialist sector to the IA UK Equity Income sector, we believe we have a more clearly defined product set, making investor choices easier to make:
LF Woodford Equity Income Fund: for investors looking for long-term, total returns bolstered by investing in companies with sustainable dividend growth
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A 15.6% premium according to the FT today. I’d like to understand:
– is it anticipated that future unquoted holdings will be held by WPCT and therefore the WEIF position in WPCT will increase over time?
– the fees situation i.e. presumably the WEIF now be paying WPCT a management fee on this holding?
Hi Philip,
The direction of travel is for the fund to gain indirect exposure to unquoted assets through its holding in the trust, rather than direct exposure. This is the first step towards that goal.
No, there won’t be a management fee of this nature. As you may know, there is no management fee on the trust – just a low level of ongoing charges and a performance fee which is subject to net asset value based performance thresholds being reached. More information available here: https://woodfordfunds.com/funds/wpct/fees/
Kind regards
Mitch
I have always been slightly uncomfortable with an ‘income focus fund’ holding shares of businesses which did not produce income. However, I was prepared to back Neil Woodford due to his envious historical record and conviction that, over the long term, capital growth would deliver a better overall return. These comfort levels have been repeatedly tested during the life of all 3 funds due to poor absolute and relative performance, some questionable investments that have blown up quite spectacularly and, in some cases, the decision to throw good money after bad.
With my confidence in Neil and his funds already having been tested, the process outlined above could now be the catalyst to rethink my investments altogether. I do not understand how the process, as outlined, can be a good one for investors in the income focus fund – those investors will surely take an instant loss as the shares in Patient Capital Trust will now have to be marked to market i.e. 83.39p each rather than the 96.67p paid. I cannot see how you could justify doing this if it was to buy assets external to your firm so is there perhaps an ulterior motive doing it within?
I am sure other will have similar queries or comments so a more detailed explanation of the reasoning could perhaps help allay any concerns.
Regards, Mike
Hi Mike,
Just to be clear, the LF Woodford Income Focus Fund is not involved in this transaction. It is a transaction between the LF Woodford Equity Income Fund and the Woodford Patient Capital Trust. There is no impact on the Income Focus Fund.
That aside, your assumption about the marked-to-market value of the Woodford Equity Income Fund’s holding in the trust is correct. As explained above, we explored how much it would cost the fund to purchase the equivalent position in the secondary market and our analysis suggested it would cost considerably more and take significantly longer, than buying at NAV in this way. The fund is paying what the trust’s assets are actually worth and we are doing this with the belief that the assets will significantly appreciate over the medium-to-long term.
Kind regards
Mitch
Regarding the issuance of NEW shares in the PCT, albeit at NAV, to pay for the transfer of five unquoted share holdings from the Equity Income Fund, surely the Trust should have sought shareholder approval first before being carried out. This is, after all, an issue of new shares and is effectively a shareholder dilution.
Hi Ian,
We have listened to feedback from clients in both investment vehicles when exploring this transaction but there is no obligation to consult with either set of shareholders, for whom we believe there are several benefits.
The Woodford Patient Capital Trust board did, of course, undertake its own independent analysis on the merits of the transfer. However, it does not need approval from shareholders as the shares are issued under its current authority to issue up 10% of outstanding shares.
Kind regards
Mitch
It may be that there is good logic in this deal on both sides and all has been done appropriately, but we need more detail on the price paid by WCPT, how it was validated by the Board of Directors, and what the Trust got for its money. Otherwise, how can a WCPT shareholder (and I am one) be reassured that he hasn’t been stiffed with some dud assets from WEIF at the wrong price? The WCPT Board needs to show shareholders where the value for our company is in this, as it is simply not evident from the data in this update.
I would also suggest some questions are asked of the Independent Directors of both WEIF and WCPT – it is their job to look at the governance aspects of deals like this and ensure that the interests of the fund and share-holders are protected. They may have done their job, but we’ve got no assurance that they have. I would suggest it is in their own interest as well as the fund/Trust and the fund/shareholders that they do provide us with some more detail.
Hi William,
As mentioned above, an additional valuation report was commissioned by the trust’s board which, as required under the Companies Act, independently verified the reasonableness of the valuations of the five stocks transferred. This is in addition to the ongoing independent valuation processes which assesses the value of all unquoted holdings at least twice yearly, with the aim of arriving at a price for those assets which treats both buyers and sellers of the fund and trust fairly.
There is a bit more information in the trust’s official release to the stock market, which you can find here: https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/WPCT/13986350.html
Kind regards
Mitch
Thank you, and I had already seen the LSE release. I am still of the view that the governance around this transaction is disappointing. That’s not a comment on the merit from an investment perspective, but in a related party transaction where potential conflicts of interest are rife you need to go the extra mile.
Could you release more details of i) the valuation report – at what premium or discount to nav were the assets transferred for each company ii) how was that valuation arrived at – just saying ‘independent’ isn’t enough iii) how did the non-executives validate it iv) who represented WPCT shareholders’ interests during the negotiations v) what involvement did Woodford (the investment company, not the person if the two can be separated), as opposed to WPCT, have in the transaction?
I’d really like to see a formal assurance statement, with some detail, from the non-executive directors of WPCT to give shareholders reassurance that this has been done in their interest.
Hi William,
I will get back to you on these points. The transaction that we announced on Friday was the conclusion of almost eighteen months of work. We first discussed the concept of moving the equity income fund’s unquoted exposure to a position in the Woodford Patient Capital Trust, in late 2017. It has been a lengthy process involving numerous parties to ensure that it has been executed in an appropriate way – one that is in the best interests of investors on all sides.
Kind regards
Mitch
It seems logical, but anything that helps the Equity Income Fund recover is OK by me.
Thanks Anthony.
I’m not competent to judge whether this is a sensible move or not, and I’m worried that the unquoted portion of the fund is now subject to double management charges for no investor benefit, but your blog otherwise shows commendable transparency in explaining to investors what is going on. Please keep it up.
Overall, of course, having holdings in both the fund and the trust, I am disappointed with the last couple of years’ performance, but hope we won’t have to be patient for much longer before seeing Neil back in the top quartile.
Hi Mark,
Thanks for your support. I can reassure you on management charges, because the Woodford Patient Capital Trust does not have a management fee. There is a low level of ongoing charges and a performance fee which is subject to net asset value based performance thresholds being reached. More information available here: https://woodfordfunds.com/funds/wpct/fees/
Kind regards
Mitch
Could you just clarify a couple of points for me please.
Will the fund show an immediate mark to market loss equivalent to the difference between the actual market value of the WPCT and the 96.66p per share paid?
What mechanism have you put in place so that anyone who wishes to redeem their units in the fund in the near future does not face a loss in value due to the difference in value between the 96.66p paid and the 83.5p current (11:30 1/3/19) market value of WPCT eg some 96.66 put option on redemptions ?
Many thanks
Geoff
Hi Geoffrey,
That is correct, the value of the Woodford Patient Capital Trust holding in the LF Woodford Equity Income Fund will be valued at the prevailing market price, rather than its net asset value. There is no mechanism in place to attempt to bridge the gap between the two. This transaction represents a faster and more cost effective method of gaining exposure to the trust – as mentioned above, our analysis suggests that purchasing almost £80m of WPCT shares in the secondary market would ultimately cost more and take significantly longer.
Kind regards
Mitch
Do you believe the WCPT fund will make a positive announcement regarding one or more of the companies invested in within the next month?
Hi Peter,
I’m afraid we cannot answer that question for reasons of market sensitivity.
Kind regards
Mitch
What is the proportion (% of exposure) of unquoted companies left in the Woodford Equity Income Fund and are there any unquoted holdings in the Income Focus Fund? Furthermore what do you reckon the underlying liquidity of the portfolio to be at current market conditions. How long will it take you to liquidate the Equity Income Fund and the Income Focus Fund without any price impact. In order to provide an answer please assume that you sell your holdings at ~20% of daily volume. I am sure you have these data available as a tool of prudent risk management. I am a holder in both funds.
Hi Ralph,
The remaining unquoted exposure in the LF Woodford Equity Income Fund stood at below 8% as at the end of February. There is no unquoted exposure in the LF Woodford Income Focus Fund.
We do indeed have liquidity analysis tools at our disposal and monitor the data closely to ensure that the fund(s) have sufficient liquidity. The funds’ Authorised Corporate Director (ACD), Link Fund Solutions, also constantly monitors the liquidity profile of the funds.
Kind regards
Mitch
Mitch,
The picture at the head of this article appears to show Neil looking at a lot of balls and the significance of this, if any, escapes me. Moving swiftly on…
These arrangements seem ok in principle, assuming that the regulator is satisfied. If so, may I offer the following observations to those of my fellow investors and commentators herewith:
(1) ‘what is the value of a parcel of unquoted shares that is not changing hands in an open market?’ and
(2) either we trust WIM to make these arrangements at what they determine to be a fair price, or we don’t, in which latter case we get out.
I invest in all three funds. A company that I work for currently recommends one of them.
WEIF followed naturally from the work of Neil and team at Invesco. WEIF appears to have a longer tail of small and specialist stuff than Neil had at Invesco, but maybe it’s about the same and WIM’s greater disclosure means that now it’s more visible.
WPCT was always something of a flyer in which to trust Neil with the small and specialist stuff that he thinks is worth backing, then be patient: some will meander, some will blow up, some will or should come good and the latter should make the exercise worthwhile. Allow 10 years.
WIFF is a bit disappointing (at least, to me) because it started holding specialist stuff, e.g. Prothena, which, whatever its potential, doesn’t appear to belong in a fund that supposedly is focussed on income. WEIF and WIFF are becoming redolent of the Invesco Income and High Income funds, which grew closer in their similarity.
So, thank you, Mitch, for your article telling us what you are doing in this matter. Such openness is much better than us finding out about it by other means. I hope that this comment is helpful, or at least of interest.
Regards,
Gordon
Re: Balls
I note none of the balls are ‘in the air’!
Hi Gordon,
Thanks for your comment. You make a valid point about disclosure. The number of holdings in the Woodford Equity Income Fund is not dissimilar to the number of holdings in the funds Neil was running towards the end of his tenure at his previous employer.
Kind regards
Mitch
disappointing news. the discount to NAV that WPCT trades at means an immediate loss (albeit small) for WEIF holders. you have also left out that there is a significant performance fee in the trust that we are on the hook for, which we do not have in the WEIF fund. so we’ve gone from getting 100% of any benefit, to just 85% (although i am aware the trust has performed poorly, so that performance fee may be years away).
when i saw the news i thought this meant illiquid assets were being sold at fire sale prices to meet redemptions, which thankfully isn’t happening.
First, what is the value of unquoted companies left in the Woodford Equity Income Fund that will presumably be transferred to the Woodford Patient Capital Trust once their “imminent milestones” are reached?
Secondly, is the total value of the Unquoted Investments transferred today combined with those that will be transferred later exceed 10% of the issued share capital of WPCT?
If so, by issuing its shares in tranches of less than 10% of issued capital under existing authority, is the Trust deliberately avoiding the inconvenience of obtaining approval from shareholders ?
…an extremely goods point in paragraph 2; refers to my earlier point about seeking shareholder approval. I note that it has yet to be responded to.
Hi Nicholas,
The remaining unquoted exposure in the LF Woodford Equity Income Fund stood at below 8% as at the end of February. The total value of these assets does exceed 10% of the issued share capital of the Woodford Patient Capital Trust. However, it would be wrong to conclude that all of the fund’s unquoted holdings will be transferred to the trust. As mentioned in the blog post, several of the fund’s larger unquoted positions are at a more mature stage of their growth cycle, and other forms of corporate activity could arise in the short-to-medium term that would further reduce its aggregate exposure to unquoted securities. The listing last week of Proton Partners International provides a timely example.
Kind regards
Mitch
Hi Mitch,
Thanks for the update on this, I’m sure this decision has all the right intentions behind it but I have just one concern I was hoping you could help alleviate.
I see many comments regarding management fees and completely understand that WPCT doesn’t have any. However, I am a holder of both WPCT and WEIF and I’m not sure how the NAV based performance fees in WPCT could eventually affect the respective holding in WEIF.
I’m assuming that WEIF will be paying these performance based fees, so could this lead to higher total expenses?
My main concern is that share price of WPCT has trailed NAV for quite some time. If the share price of WPCT fails to move with NAV could this lead to poor performance of WEIF if holdings have to be sold to meet these additional fees?
Apologies if my question isn’t entirely clear but just concerned this may lead to higher overall expenses in WEIF.
Hi Stefano,
I can reassure you that the overall expenses on the Woodford Equity Income Fund will not be affected in the way you describe. The performance fee on the Woodford Patient Capital Trust will accrue once it exceeds the hurdle rate of delivering a cumulative 10% annualised net asset value return. However, the equity income fund will not directly pay the performance fee, nor will it need to sell holdings in order to meet the fees. The net asset value of the trust will immediately account for any performance fee as it becomes due, so the performance that the fund receives will be always be net of any performance fee.
I hope this makes sense, but please do ask if you have any further questions. You can visit the trust fees page for more information: https://woodfordfunds.com/funds/wpct/fees/
Kind regards
Mitch
So WEIF will pay both the 0.75% WEIF fee plus the WPCT performance fees. It’s just that we won’t see it. It would just show in a lower NAV of WPCT which influences the share price of WPCT. Which in turn effects the NAV of WEIF.
The answer is yes, there will be double charging but somehow the tone of the answer is “no, there’s no double charging”.
As an investor in the Trust, I am concerned about the concentration risks on the specific stocks being transferred in; according to the FT, the Trust will be doubling its exposure to these stocks. If the Trust had £72.9m cash, would the manager have chosen to invest in these stocks and in these proportions? I very much doubt it.
Hi Ben,
You may already have seen the follow-up piece we published yesterday. It contains a quote from Susan Searle, Chairman of the Woodford Patient Capital Trust:
“This is a highly positive transaction for shareholders. We’ve increased positions in portfolio companies, in which the Board and the manager has conviction. The Trust has raised funds at a significant premium to the current share price, resulting in no dilution to shareholders and a scaling of the Trust.
“The Board sought advice from a range of parties and had the companies, which we already own and know well, independently valued. This deal has been something we have been considering for many months and the Board, which is fully independent, has debated the merits of this transaction with its advisors and concluded it is a positive deal for its shareholders.”
Kind regards
Mitch
I think NW is walking through an installation of Yayoi Kusama’s – ‘Narcissus Garden’ – a thoughtful and contemplative work. However, as I possess far less knowledge re. the inside machinations of Funds & Trusts than of Art I am simply hoping that this asset transfer leads to an improvement in the value of my Woodford investments…..
Best wishes
Janette
Hi Janette,
Your correct, it is Narcissus Garden but that isn’t Neil walking through it. From our long-term perspective, we are very confident that this move will be positive for the performance of both of the products involved. Thank you for your support.
Kind regards
Mitch
The rationale behind this move is clear but WPCT investors will now have a concern about the potential impact on the Trust price of any further forced selling from WEIF due to illiquidity.
I don’t like this, and neither does much of the news coverage. It feels underhand, and that’s not good. If, as an investor in the equity income fund I have over-paid by 15% (by paying the NAV not the share price) for shares in the Patient Capital Trust (a share issue I chose not to participate in) then I am unhappy. I also note the comments that suggest there is a conflict in interest here. If Neil decides there is a ‘better investment opportunity elesewhere’ than in his own WPCT will he simply sell this share holding on the open market? I doubt it. Therefore it follows this will not help the illiquidity problem for the equity fund investors. This has been my worst investment in the last 4 years. My last comment was witheld, so I don’t have that much confidence in the openess of this forum either.
Hi Jerry,
We are a transparent organisation, which is rare in the financial services industry. We fully disclose the portfolios every month and explain what’s happening to the funds, because we want our clients to understand how their investments are being managed.
We also give investors the opportunity to comment and ask questions, because we want to encourage conversations and debate. We don’t mind if you disagree with our views but we reserve the right to block comments where appropriate, for example, if they are considered likely to offend. Further information about our moderation policy can be found here.
https://woodfordfunds.com/social-media-guidelines/
Kind regards
Mitch
Interesting piece in the Sunday Times, I was wondering if you had any intention of updating shareholders as a result? I’d be particularly interested to here your comment regarding the current make up of assets in the WEIF, given that you continue to state that the primary activity and strategy is to invest in UK listed companies. Would you agree that in fact there have been significant shifts towards a greater level of unquoted companies, which presents, potentially, considerable risk.
Hi Peter,
There are a number of assertions in the article that we would argue do not stand up to scrutiny. In fact, there is a different Times article which we believe is worth reading:
https://www.thetimes.co.uk/article/neil-woodford-kf0s0dh2hf6
This one was published in 2004 and it contradicts several of the assertions made in the more recent piece.
By way of further example, Neil has never described himself as an investor who focuses on “large, reliable British businesses” and we have always guided investors to expect the portfolio to evolve over time, explicitly highlighting the shift from large caps in a blog post in September 2016 (https://woodfordfunds.com/words/blog/evolution-not-revolution/).
Neil’s funds have been substantially underweight the FTSE 100 before. We don’t have the data, but I remember running some analysis several years ago, on Neil’s portfolios in 2002, which showed that the exposure to the FTSE 250 index at that time was more than 50% of assets, with a significant overweight to small caps as well.
Meanwhile, the funds do not contain any exposure to a cryptocurrency website – this is factually incorrect, we assume there is some confusion here with the Norwegian fingerprint technology business, Idex.
There is a reference in the article to Neil’s “new passion” for biotechnology start-ups. There is indeed a collection of small positions in early-stage biotechnology companies in the fund currently – this is an incredibly attractive long-term opportunity, in our view, and we would acknowledge that it is not without risk (but then again, it would be wrong to characterise any form of equity investment as risk-free – see below). Our risk is mitigated by spreading our exposure over many different positions in many different therapeutic areas. It would be wrong to classify them as “start-ups” however, many of them have been in existence for more than ten years. Equally, it is wrong to characterise this as a new passion. It is not a passion – it is a disciplined decision to invest in a profoundly undervalued corner of the UK equity market. Furthermore, it is not new – Neil has been investing in British biotech firms since the mid-1990s, with the aptly named British Biotech, one of his earliest positions.
It is true to say that at least part of the redemptions we have seen have been met by selling holdings in larger companies. It is another thing entirely to say that these are “strong, steady” stocks – that will only become clear as time passes, but in many instances (BAT and BT, for example), they have been sold from the portfolio at an opportune time. The article appears to infer that large stocks are less risky, but this is a dangerous assumption for any investor to make. The experiences of Vodafone since 2000, HBOS and RBS since 2007 and BP following the Macondo incident in 2010, are all testament to that fact.
We would not agree with the suggestion that a greater level of exposure to unquoted companies necessarily presents considerable risk. This must depend on how you define risk, of course. There is a suggestion in the article that smaller companies are risky because they are volatile. As a starting point, we do not equate risk with volatility, but the notion that smaller companies are volatile should be challenged. The FTSE Small Cap index consistently demonstrates a lower volatility than the large cap FTSE 100 index (according to Bloomberg, over the past year, the standard deviations are 12.80 and 8.28, respectively).
We view risk in absolute terms – as the potential for a permanent loss of capital. From that perspective, whether a stock is quoted or unquoted makes no difference at all. In fact, we can have a much closer relationship with an unquoted business because there is no regulation of the flow of information from an unquoted business to its shareholders. It doesn’t mean we won’t make mistakes, but it does mean that we can have a much more intimate knowledge of an unquoted business, than is possible of a listed business, where for regulatory reasons, there is a distance between a company and its shareholders. From this perspective, you could argue that there is less risk involved in investing in unquoted companies.
There is an argument to suggest that investing in earlier-stage businesses is more risky than investing in more mature businesses and we would accept that, up to a point. However, there have been times over the last 30 years when investing in large caps has proved to be an incredibly risky thing to do, from the perspective of a permanent loss of capital. Which brings us neatly on to the concept of valuation – the biggest risk that any investor faces is paying the wrong price for an asset. We have substantial confidence that the valuation at which we are currently able to invest in a diversified collection of early-stage businesses – both quoted and unquoted – is low enough to mitigate the risks involved, and deliver very attractive long-term returns.
Kind regards
Mitch
Thanks Mitch, the detail and length of your reply is very much appreciated.