Peter Walls of Unicorn Mastertrust has added to a stake in Woodford Patient Capital Trust and backed activist trust Crystal Amber after Neil Woodford sold out last month.
Walls’ £97 million Mastertrust fund invests in investment trusts and in March the manager opened a position in Woodford Patient Capital Trust (WPCT) after its shares weakened after a controversial share swap with WEIF.
WPCT’s purchase of holdings in five unquoted companies from WEIF for a 9% stake in the trust’s shares highlighted the instability of the fund whose manager Neil Woodford was struggling to reduce its exposure to illiquid, unlisted stocks to below the 10% regulatory limit for open-ended funds.
By early June, the fund was forced to suspend trading after being overwhelmed by sales requests from worried investors. This hit the shares of Patient Capital again. Three quarters of its assets are invested in companies held by WEIF, whose valuations are under strain as the fund rushes to sell investments and raise cash for investors.
Mastertrust's factsheet records that after a 27% fall in June, Walls bravely doubled up, buying more shares in Patient Capital and lifting it to a 2.1% weighting in his fund.
The trust’s shares have continued to drop, however, falling 15% in July and trading on a 43% discount below their net asset value. Much of the decline has come this week after the disclosure that Woodford had sold over half his stake in the trust for over £1 million.
Although analysts think the outlook is poor, the trust’s board may replace Woodford with a new fund manager, or opt to wind down the trust and give shareholders back their money, which may trigger gains for investors like Walls.
Commenting on the suspension of the open-ended fund, Walls criticised Woodford for ‘taking on too much money and believing his own propaganda’. Woodford Equity Income had a market capitalisation of £3.7 billion when it was suspended.
‘As assets grow, the ability to add value via alpha [investment outperformance] diminishes,’ added Walls.
He said the episode would only ‘lead to more regulation that will not stop crooks’ and that active fund managers would be the ones to pay as a result.
At the time of the suspension, Walls commented he could not remember any situation quite like this debacle.
Similarly, he argued it was ‘complete nonsense’ that open-ended funds were able to hold property assets, with many having also run into illiquidity issues prompting suspensions.
‘I can’t understand any rational for…property funds with a 20% cash buffer,’ he said.
Walls, a former investment trust analyst, has had a better time buying into activist Crystal Amber (CRS) after its shares tumbled in the fallout of the WEIF suspension.
Walls said the ‘dislocation’ in Crystal Amber's valuation this caused gave him an opportunity to add the company whose fund manager Richard Bernstein is currently locked in a battle with banknote printer De La Rue (DLAR).
‘I like the strategy, in that it’s truly activist and I think it’s an interesting long-term investment,’ said Walls.
In the month after the Woodford fund was suspended, shares in Crystal Amber tumbled from 220p to 197p as speculation mounted Woodford would be forced to sell a long-standing 16% stake in the £185 million company listed on the Alternative Investment Market as he desperately sought to raise cash and restructure his fund.
The shares have since steadied as Woodford dumped the position on 17 July removing an ‘overhang’ on the stock, though they remain cheap on a wide 20% discount below their net asset value.
Despite Woodford drama denting its share price, it has maintained strong net asset value (NAV) returns over the past year, up 14% versus 5% from the FTSE Small Cap ex ICs, according to Numis Securities data.
The trust made a £1 million profit by selling its 2.3% stake in Patient Capital stake in March.
Unicorn Mastertrust has also done well, producing a 10% return so far this year that places it 90th out of 156 funds. Longer term it ranks among the top funds in the IA Flexible Investment sector – over the last decade the fund is up 240%, second of out 77 funds in the peer group.
Other recent investments
AVI Japan Opportunities (AJOT), the £102 million activist smaller company trust managed by Joe Bauernfreund, was another newer position in Walls’ fund.
It accounted for 1.7% of the fund as of its annual report in March. Walls participated in its launch in October, noting the opportunity to ‘unlock…long-trapped value’ in Japanese smaller companies through corporate governance reform and shareholder activism.
He also participated in Terry Smith’s Smithson Investment Trust (SSON) launched in October, as the smaller companies version of the star manager’s Fundsmith Equity open-ended portfolio. However, Walls sold his position after shares in the £1.4 billion trust reached a ‘silly premium’, which hit 12% in December.