Star UK equity income fund manager Neil Woodford has confirmed he will be launching a closed end growth fund in April this year. The investment trust will be called the Woodford Patient Capital Trust (WPCT), and will invest up to 75% smaller companies – a mix of unquoted and quoted equities – with the remainder invested in larger undervalued companies. These larger companies will help provide funding and stability in the initial stages of the fund launch. There will be a portfolio bias towards companies that show innovation and invention within the science and technology sectors.
Speaking at a private media dinner last night, Woodford said that it was a long-term ambition of his to launch a fund that supported British industry in this way.
“I have wanted to launch a fund like this for a very long time, as I passionately believe that these sorts of businesses offer fantastic opportunities both for investors and the economy,” he said.
“The UK has a fantastic record of innovation but we struggle to commercialise this – to translate it into real results for the economy. Valuations within this space are compelling and investment in successful start-ups will produce symbiotic outcomes for both the economy and private investors.”
Woodford conceded that investing in less-liquid early stage businesses would take longer to deliver results, and in the initial stages would be a labour intensive task, but he promised that within two years the new fund would deliver on its promise of high single digit annual growth.
There will be an innovative fee structure – with no management charges at all, instead levying an as-yet-to-be-disclosed performance fee. Woodford will invest an undisclosed amount of his own money into the trust and his performance fee will be paid in new shares, further aligning his interests with shareholders’.
The investment trust aims to raise £200 million initially, with the option to issue up to 10% of assets under management in new shares a year. Woodford admits that his ambition is deploy a “significantly larger amount of capital” into the sector over time.
As well as biotech, pharmaceuticals and medical technology companies – many of which will be sourced just a few miles away in the Oxford Science Park – Woodford expressed interest in “disruptive” companies such as peer-to-peer lenders, online estate agents and educational businesses. The full prospectus will be released later this month before launch in mid-April.
There has been much speculation as to when Woodford would launch a second fund from his eponymous investment house, and whether the new offering would be open or closed ended.
Woodford has long been a champion of UK industry, and last year said that VCTs undermined the small business sector.
“Venture Capital investments restrict start-ups. Instead of deploying investors’ capital in the best way the five-year deadline constrains the company,” Woodford reiterated last night. “The deadline nature of VCTs also increases the failure rate of these companies as they are not allowed time to make mistakes. This in turn increases investors’ risk perceptions – often the difference between a failure and a success in start-up businesses is just two years of patience.”
This is not Woodford’s first foray into biotech and innovation. Woodford already invests in Stem cell business ReNeuron (RENE) and Oxfordshire drug company e-Therapeutics (ETX) in his Equity Income fund.
Woodford Funds is based just 13.5 miles away from the science park where e-Therapeutics is based. The county boasts 50 high tech and innovation businesses. Woodford Equity Income has 5% invested in the US and 11% invested across Europe, and the new fund is expected to split the unquoted holdings equally between UK and US stocks.
Woodford has a history of investing in small and unquoted companies – but the investments have brought the fund manager varying degrees of success.
Morningstar fund analyst Daniel Vaughan notes that the contribution of the unquoted companies to Woodford’s Invesco Perpetual funds was variable over shorter-time periods but estimated the holdings made a small positive contribution to the total outperformance over five years, with the average portfolio weight of early stage businesses less than 5%.
The basic investment requirement for UCITS is that at least 90% of its net asset value must be invested in transferable securities and money market instruments which are either listed on a stock exchange or which are dealt on a market which is regulated, operating regularly, recognised and open to the public.
“Woodford’s team are reasonably well resourced to research down the cap scale with Saku Saha, who has five years’ investment experience, dedicated to research and idea generation of early stage companies, doing most of the discounted cash flow modelling,” Vaughan added. “Paul Lamacraft also does due diligence and is more experienced than Saha”.
Morningstar fund analysts awarded Woodford Equity Income a Bronze Rating. Analysts downgraded Woodford’s former open end funds and investment trust, now run by Mark Barnett, following his departure from Invesco Perpetual last October.
