Shares in Woodford Patient Capital Trust (WPCT) climbed as the board revealed plans to reduce borrowing and buy back shares to reduce its discount, which is currently more than 30%.
Investment trusts, unlike unit trusts, are allowed to use borrowing to invest, which magnifies gains on the upside – but also lead to bigger losses. WPCT is allowed to gear up to 20% of its portfolio. Going forward, WPCT will still use gearing but at reduced levels and any move above 10% will have to be approved by the board.
WPCT’s current gearing level is 16.8% but the board plans to reduce this to 10% within six months and to zero within a year.
After gearing has been reduced, the trust says, shares will be bought back, as long as there is sufficient cash at the time. The board says it will balance the need to use capital to support its investments and to buy back shares.
Given the recent furore over the Woodford Equity Income’s illiquid assets, the trust’s board also stressed that the portfolio’s unquoted assets are independently valued according to “objective, consistent and transparent” guidelines.
The board notes the recent speculation about how the trust’s assets are valued and points out that authorised corporate director Link has sole responsibility for pricing unquoted securities.
Link has been caught up in the controversy over the open-ended fund’s suspension. It was criticised by Financial Conduct Authority chief Andrew Bailey for not notifying the regulator over the Guerney listing of some of the equity income fund’s stocks. Giving evidence to MPs this week, Bailey said that Link and Woodford were “using the rules to the full and they were not telling us they were doing that”.
Link has also been criticised by a number of fund managers for not raising concerns over the Woodford fund’s liquidity.
Stuart Alexander, chief executive at Gemini Investment Management, said: “The ACD is the first port of call when there is an issue at the fund, but no-one was challenging the decisions made by Woodford. These Guernsey listings should not have been allowed in the fund; they may be listed now but they are not liquid.”
The trust’s board explained in detail how each company in the portfolio is valued: an in-depth valuation is performed independently by information company IHSMarkit using both publicly available data and that provided by the companies themselves. Valuation occurs at the time of investment occurs, then every six months and when a “triggering event” occurs - one which could affect the value of the business.
The board also addressed the issue of assets held by both the open-ended and the closed-end trust, which are closely linked. In March this year, the equity income fund transferred five unquoted holdings in Patient Capital for a stake in the closed-end fund.
Even in the event of the equity income fund making “forced transactions”, fire sales to boost liquidity, that would not necessarily mean the same shares in the trust would be marked to the same price.
While the Woodford trust has remained open after the suspension of the open-ended Woodford Equity Income, its shares have come under sustained pressure in June, and now sits at a discount of 30% to net asset value (NAV). The share price has fallen from 76.5p at the start of June to 58p, just over 24%.
The trust also announced the immediate appointment of a new non-executive director. Stephen Cohen, who chairs the audit committee at Bronze-rated JP Morgan Japan Investment Trust (JFJ), will become chair of the Woodford Patient Capital Trust’s audit, risk and valuation committee. Carolan Dobson will step down from the trust as non-executive director with immediate effect after three years. Susan Searle, chair of the trust, said a replacement for Dobson is being sought as well as for an additional non-executive director.
