Neither Philip Hammond nor Neil Woodford have had a particularly good year, but last week’s Autumn Budget may have thrown both a lifeline.
Woodford was 'absolutely delighted' with the initiatives
Vetern UK equity income investor Woodford called the Budget, which may have saved Chancellor Hammond his job, “shrewd and appropriate”. The fund manager will be hoping it provides some of his investments with a welcome boost and be a catalyst to turn performance at his investment trust around.
The Chancellor announced a range of packages aimed at providing “knowledge-intensive” businesses with access to “scale-up capital”. They include a £2.5 billion investment fund and incentives for tax-efficient Enterprise Investment Schemes and Venture Capital Trusts.
The intricacies are yet to be ironed out, but Woodford was “absolutely delighted” with the initiatives, saying they “will help young, knowledge-intensive British businesses… fulfil their long-term potential”.
“This has to be great news for the UK economy, great news for many of the young businesses we have backed and, therefore, great news for the portfolios,” the fund manager added.
Woodford has run into a range of well-publicised problems this year, from profits warnings at doorstep lender Provident Financial (PFG) to leadership issues at breakdown specialist AA (AA).
He’s also seen his underperforming flagship Woodford Equity Income fund dropped by a trio of clients, including long-term backers Aviva and Jupiter.
Woodford Patient Capital (WPCT) hasn’t been immune, either. The trust has been through a torrid time since IPO in April 2015 at 100p and has slipped to 85p today.
However, while Ben Yearsley, director at Shore Financial Planning, says he’s been a critic of Woodford’s open-ended funds, he has “more patience with Patient Capital” as “it was always designed as a long-term investment”.
BMO Global Asset Management’s Peter Hewitt agrees. He admits investing in the trust at flotation was probably a mistake. However, he’s recently topped up F&C Managed Portfolio Growth Trust’s (FMPG) holding. “If you’re coming to it now, I think it looks quite interesting,” he explains.
Hewitt believes the next two years will be key for the trust, and hopes many of the holdings will begin to come of age. This “could make a material difference on the upside”. “I remember saying before the IPO that this is genuinely a three- to five-year project,” he adds.
Can Woodford Pick The Winners?
Adrian Lowcock, investment director at Architas, a firm that recently sold out of Woodford, says the question hanging over WPCT is whether Woodford any good at picking smaller companies. He may have had a long tail of small companies in his Invesco Perpetual funds, but this trust is his first pure play on private equity-type investing.
“It takes additional portfolio construction skills and risk management is even more important,” Lowcock says.
Hedge fund Kerrisdale Capital recently launched a scathing attack on Woodford’s record when investing in early-stage biotech firms and initiated a short position on Prothena (PRTA), WPCT’s largest holding.
Kerrisdale said Woodford has a poor record investing in the sector, citing his “now virtually worthless” position in Northwest Biotheraputics, which he paid north of $150 million for, as a case in point. Allied Minds (ALM) also hasn’t worked out too well, either.
Woodford countered with his recent successes like Oxford Nanopure, Purplebricks (PURP) and Immunocore. “These are all excellent examples of companies that have made meaningful progress on the road to commercialisation,” he adds.
Still, at present, the jury is still out on whether Woodford can pick the winners more often than he picks the losers, says Lowcock.
Budget Boost?
To the initial question, consensus seems to be that the Budget itself won’t have an immediate impact on WPCT, but could benefit his next wave of investments.
Laith Khalaf, senior analyst at Hargreaves Lansdown, says the direction of travel is generally positive for the UK’s early-stage businesses. He points out that the performance of these firms is reliant on having access to the right kind of capital at the right time, but notes: “The companies in WPCT already have their white knight in the form of Neil Woodford himself.”
As a general point, Yearsley expects the Budget to encourage longer-term investment from UK investors. Woodford is tapping into fertile hunting ground in backing many fascinating early-stage tech and biotech businesses emerging from the likes of the Oxbridge Universities.
Hewitt makes a similar point, noting that Woodford-backed companies likely to have benefited from the government’s investment fund are those he will look to invest in during his second five years, between 2020 and 2025.
That’s a long time horizon for many retail investors, but the ideal investment for those years away from retirement as there’s big growth potential. To that point, Yearsley says it’s a good choice for tax-efficient wrappers like ISAs and SIPPs.
Woodford Alternatives
For those sceptical on Woodford but wishing to gain exposure to this area, Yearsley likes Pantheon International Participations (PIN), run by Andrew Lebus. It’s a fund of private equity funds that we’ve profiled before and provides solid exposure to the unquoted space.
Lowcock’s says River & Mercantile UK Micro Cap (RMMC) invests in more conventional listed equities, but those with a market value of less than £100 million that “have strategies that enable them to take market share”.
That’s best illustrated by its largest holding, Blue Prism (PRSM), an automation specialist. At IPO in March 2016, Blue Prism’s market capitalisation was less than £50 million. It’s now worth £900 million. The share price has grown from 78p to 1,439p.
Hewitt is excited about the £1.3 billion Syncona Investment Trust (SYNC), the sixth largest holding in his Growth Portfolio. Formerly known as the Battle Against Cancer Investment Trust, it acquired Syncona Partners LLP, a subsidiary of charitable fund the Wellcome Trust.
In its previous guise it was a fund of hedge funds, but it’s now transitioning towards becoming predominantly invested in early-stage life science companies. It’s already had success spinning out Nightstar Therapeutics (NITE) and listing it on NASDAQ earlier this year. Blue Earth Diagnostics could get a listing next year, says Hewitt.
It makes similar investments to Woodford, but also has the industry knowledge to help with bolster the management teams. It trades at a premium to net asset value of around 20% "because of the potential within the biotech portfolio".
It donates significant amounts to charities each year, "so you have a feel-good factor if you hold shares in this one also".
