Skip to main content

Riding the storm

No comments

26 April 2019

David Prosser takes a look at recent noise regarding Neil Woodford’s Patient Capital Trust and examines the benefits of the closed-ended structure in the case of this fund.

It isn’t always easy to follow even the most straightforward investment advice. We routinely tell people considering putting money into the stock market that they must be prepared to take a long-term view – that they shouldn’t even consider equities if they have no stomach for short-term volatility. Fine in theory, but when the volatility actually arrives, it takes nerve to stay put.

This is the dilemma facing investors and advisers with exposure to Neil Woodford’s Patient Capital Trust. As the fund celebrates the fourth anniversary of its launch, the media is full of analysis of the rocky road down which the fund has travelled. With shares in the fund 20 per cent or so down on their price at launch, a good deal of that analysis of the “Should I stay, or should I go?” variety.

There isn’t a right answer to that question. Ultimately, every investor must make their own decision, based on their own views about the prospects for the fund – and, of course, their personal circumstances.

Still, given that for most investment pundits who dole out that advice about taking the long-term view, five to 10 years is a typical definition of what they mean, complaining about performance after only four years feels a little churlish. All the more so given that this fund doesn’t invest in mainstream, blue-chip equities; rather, much of its portfolio is invested in small enterprises that Mr Woodford hopes will one day make it big. Such businesses can – and have – blow up spectacularly. Equally, they can deliver spectacular returns.

The clue with this fund is in the name. When it comes to early-stage companies, patience is required. Investors allocating their cash to such businesses must be prepared to be sanguine about setbacks and to stick it out until the portfolio stars come good.

Thank heavens for one very early decision Mr Woodford made. In developing this fund, he chose to launch it as an investment company, rather than an open-ended product. That has proved a wise move, enabling the fund to cope with investor unrest without having to liquidate assets.

Indeed, while the trust’s shares are off 20 per cent since launch, the underlying value of the portfolio is down by only 3 per cent or so. Although the discount at which the shares trade relative to the value of the fund’s assets has slipped ever wider as a result of investors selling up, losses haven’t been locked in. If and when investor confidence in the fund returns, there will be a double benefit as asset prices recover and the discount narrows.

In an open-ended structure, by contrast, Mr Woodford might now be facing the prospect of selling assets to meet redemptions, plunging the fund into a vicious circle of decline. That would be a much tougher position from which to recover.

None of which is to say Patient Capital necessarily will come good, though Mr Woodford says he is excited about the near-term potential of several businesses in the portfolio to hit the big time. However, the lessons of the Patient Capital story are clear. If you’re going to invest in equities, particularly a fund very deliberately sold as a long-term play on early-stage companies, don’t be surprised when your patience is called upon. Equally, look for a fund structure appropriate to this kind of exposure – an investment company has a string of advantages in this context.

Learning zone

Visit the AIC's new Learning Zone and enrol in online training courses.

Start now