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Ex-Woodford trust hopes healthcare companies can fight Covid-19 and discount

18 May 2020

Schroder UK Public Private, the former Woodford Patient Capital Trust, hopes healthcare holdings combating coronavirus pandemic might finally be the good news it needs for a turnaround.

Schroder UK Public Private (SUPP ), the investment trust formerly known as Woodford Patient Capital, is hoping its healthcare holdings combating the coronavirus pandemic might finally provide a dose of the good news needed to kick-off a turnaround.

Although the 2019 annual results for disgraced fund manager Neil Woodford’s former flagship trust this month revealed its net asset value (NAV) could be cut by 8% on Covid-19 concerns, after having already halved in 2019, the new managers argued there might be an upside.

Co-managers Tim Creed and Ben Wicks spoke to private investors in a webcast last week, the first of its kind since asset manager Schroders took over in December, to discuss the portfolio and how the trust can begin to close the 50% discount to NAV its shares have fallen to.  

‘The main message today is that we feel in control of this process and we’re operating on our terms,’ said Wicks, also Schroders’ head of research innovation.

‘We’re navigating at a pace that we are comfortable with to ensure that the value of the assets in this portfolio are protected and can grow.’

At the end of December, 58% of investments were in healthcare. Though long-term the managers want to trim this to a quarter to ‘balance’ the portfolio, the pair emphasised its advantage currently.

‘The vast majority of companies are revenue generating and they are in the healthcare space. We think this is a good balance for the current times,’ said Creed, also head of European and UK investment for Schroder Adveq, the firm’s private equity wing.

According to Schroders’ analysis, 28% of the portfolio was likely to require ‘some type of additional financing’ to support their business in the next 12 months.

Creed said this was ‘a better picture than most other vehicles’, considering some of these early-stage companies would have been due to raise money anyway. The managers expect 40% of the portfolio will suffer little revenue loss or even benefit from the situation.

Creed emphasised that Rutherford Health, one of its large holdings, was experiencing increased demand as more patients were treated in its cancer proton beam therapy centres while NHS facilities focused on Covid-19.  

‘Rutherford have stepped in to help the NHS and taken on quite a number of additional patients, above the number they had expected or planned,’ Creed said of the partnership.

‘This is a great thing for their relationship with the NHS and will help the company long term.’

As was partially highlighted in the results, DNA sequencer Oxford Nanopore and BenevolentAI, which uses machine learning to enhance drug development, have also contributed to global effort against the disease. The trio make up a third of investments.

‘These three companies are three of the four largest in the trust, so it’s important that people recognise what these companies are doing at this time,’ said Creed.

Broker Numis said Oxford Nanopore’s ‘real time, portable sequencing has been used to track the global spread of Covid-19 and in the future could be a core technology in global viral surveillance systems’, and that the company had emerged as a leader in its segment.

Battling an unbelievable NAV

SUPP’s shares currently trade at 24.1p, less than a quarter of their launch price of 100p five years ago. After numerous writedowns, including several on companies stemming from the controversial swap deal between the trust and now defunct Woodford Equity Income fund, the NAV as of 31 December stood at 49.46p.

Wicks said the key to closing the discount would be growing belief in the accuracy of the trust’s NAV.

‘We need to ensure the reported NAV is something the market can believe in and I think that happens through transactions and through time,’ he said.

The managers highlighted that three of the top five investments - Oxford Nanopore, Immunocore and BenevolentAI - had raised money recently, giving credibility to the NAV. Albeit, BenevolentAI last raised money in September in a round that saw its valuation halved.

‘The fact that [they] have had these high quality, internationally recognised investors coming at these valuations should give people and gives us certain comfort in the valuations of those companies,’ said Creed. 

The trust has moved to quarterly valuations, in common with most vehicles containing a large proportion of private investments, with the NAV to 31 March to be reported by the end of June.

The managers are focused on paying down the trust’s level of debt before making more substantial changes, so they said it would be at least a year before the portfolio starts to achieve the balance they are aiming for. 

That includes increasing irs liquidity by investing in more established and listed growth companies, targeting 20-40% listed investments. A resolution at 5 June’s AGM to lift an 80% limit on unquoted holdings and cut the minimum number of holdings from 30 to 40 is a ‘short term’ measure only, to help with portfolio management and allow some sales.

In terms of sector composition, as well as halving the exposure to healthcare, the managers want to increase the technology exposure to a quarter and cut the exposure to financials, a fifth of investments currently.

Creed said the crisis would have a clear effect on top holding Atom Bank, which primarily focuses on mortgages, but that the challenger bank had ‘on a relative basis, a much more conservative mortgage book than most other providers in the UK’ and therefore should be comparatively robust.  

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