The Woodford Patient Capital (WPCT) investment trust has fallen to the widest discount on the market, Morningstar data reveals.
Shares in the investment trust this week dropped to a record low 59p, a discount of 32.1% to the net asset value of the underlying companies that it invests in. It is more than double the trust's average 12-month dsicount of 13%.
Morningstar data shows that of all the UK-listed investment trusts with assets under management of at least £200 million, just five trusts have a discount wider than 20%.
What is a Discount?
Investors putting money into trusts buy shares just as with any listed company. This is unlike funds, where you buy units, which are created and destroyed in line with supply and demand as assets under management rise and fall.
The amount of assets in a trust and the number of shares in issue is finite. That means the share price rises and falls in line with supply and demand. When a trust is popular, investors may be willing to pay more for a share than its intrinsic worth – they will pay a premium compared to its net asset value. Conversely, when a trust is out of favour the share price will fall and investors will be able to buy shares at a discount to their actual value.
Annabel Brodie Smith, communications director at the Association of Investment Companies, explains: "Whether an investment company trades at a discount or premium is driven by investor sentiment. This can be investors' views on the trust itself - if it has very strong performance or an attractive yield, for example - or by market sentiment in general."
Shares in Woodford Patient Capital have been hit in recent months amid fees about the contagion risk of the ailing Woodford Equity Income fund. The fund owns 9% of the trust and the two share a number of holdings.
Shares have fallen 20% over the past week alone and the board of the trust has tried to reassure investors that the share price slump would not affect the underlying investments in the portfolio.
David Holder, senior investment research analyst at Morningstar, says: “Even fairly generalise sector such as commodities, healthcare and technology will find themselves deeply out of favour with investors time to time as the prospects for returns wax and wane. These forces are often more powerful in more nascent and niche areas such as specialist lending, real estate or renewable energy, which can be buffeted by external shocks, political and regulatory change.”
Buying Opportunity for the Brave
Of course, for those who believe in the long-term potential of a trust, such a wide discount could provide a buying opportunity. Brodie-Smith adds: "Buying an investment company at a discount does provide an opportunity for an extra gain if the discount narrows, but it should never be the only reason for buying an investment company. It may be on a wide discount for a very good reason such as poor performance so it is important to do your research before investing."
Other trusts at a wide discount include Hansa Trust, at 28.7%; its 12-month average discount is much wider than Patient Capital's at 25.8%. The three-star rated trust is unusual in that 30% of its assets are in one company; Ocean Wilson Holdings is a Bermuda based investment company operating a maritime services company in Brazil through a subsidiary. Last month, the firm reported that revenue had fallen 15% in the first quarter of the year owing to adverse exchange rates, stronger competition and lower operations.
VPC Speciality Lending invests in loans to consumers and small businesses, while Civitas Social Housing is a real estate investment trust focused on social housing developments across the UK.
In total, some 42 investment trusts were trading on a double-digit discount at the end of May, according to Morningstar Data. These include the Silver-rated Law Debenture trust (LWDB), Silver-rated JPMorgan Emerging Markets (JMG) and Bronze-rated Witan Pacific (WPC), trading on discounts of 11.1%, 10% and 12.4% respectively.
At the end of May, the average discount across all investment trusts was 2%.
Holder adds: “Woodford Patient Capital is an example of when a very adverse set of specific circumstances can lead to a widening of a discount.” However, he points out that while Patient Capital’s discount is wide by comparison to its own history, it is not much wider than comparable private equity trusts.
He adds: “On this basis, it is possible that once the storm abates and if there is some positive news flow around companies in the portfolio the discount could narrow. But it will take some time for investors to feel comfortable investing here.”
