Neil Woodford’s investment trust Patient Capital (WPCT) is issuing more shares six months after launch, to meet the demand of investors. The fund began raising money in January, with a public offering in April. Since then Woodford has managed to deploy 75% of the £800 million raised to start-up companies that show innovation and invention within the science and technology sectors.
At launch the investment trust targeted £200 million, with the option to issue up to 10% of assets under management in new shares a year. Woodford admitted at the time that his ambition was deploy a “significantly larger amount of capital” into the sector.
The trust is now valued at £952 million and is issuing £80 million new shares in a bid to reduce the 14% Premium. The fund fell 4% on the news.
What is a Premium?
Unless you buy in on the investment trust IPO, any shares you purchase in an investment trust will usually be bought over an exchange, at the prevailing market price.
The market price should reflect the net asset value (NAV), but is ultimately based on the forces of supply and demand prevailing in the market for the trust’s shares. If demand for an investment trust is high, shares may trade at a premium to their NAV.
What Effect Does Share Issuance Have on Investors?
Usually when a new investors wishes to buy shares in an investment trust there must be a seller. But buy issuing new shares, Woodford can grow the investment base of Patient Capital and reduce the Premium on the trust.
“This structure is almost a hybrid between closed and open-end funds,” said Laith Khalaf, Senior Analyst, Hargreaves Lansdown. “But there is a cap on the amount that they can issue, so I do not think it is a problem at the moment. The manager has an option to expand the trust by 10% a year, which he may not do forever, only until the premium is more manageable.
“If the trust was raising significantly more in share issuances it would raise questions as to whether Woodford would be able to invest in the sort of companies he is looking for start-ups, but it is Woodford’s call. When is enough money too much?”
At the time of launch 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. So far the fund has made a modest return to investors.
Should You Buy These New Shares?
The Premium is significant, so you are not exactly buying a bargain says Adrian Lowcock, Head of Investing at AXA Wealth.
“Investors should balance their long term objectives and expectations for the trust against the short term profit which they could make before deciding on the best course of action,” he concludes.
Patient Capital is not currently rated by Morningstar analysts because of its short-term track record. But as with any trust in this sector, investment decisions should be based on the investor’s risk appetite. This trust will be more volatile than the UK Equity Income funds Woodford is famous for and should only ever play a supporting role in a well-diversified portfolio.
