Update on our views following the suspension of trading in the Woodford Income Fund – 5 June 2019
As you will undoubtedly have read in numerous press articles over the past couple of days, Woodford Investment Management took the significant decision to suspend all trading in the Woodford Income Fund following a steady stream of outflows. As far as we can remember, this is an unprecedented step for an open-ended equity fund in the UK, especially under market conditions that are not deemed “abnormal” such as the ones experienced during the Great Financial Crisis.
The TB Wise Multi-Asset Growth fund has invested in the Woodford Patient Capital Trust (WPCT) since the first quarter of 2018 and, although this suspension is specific to the Woodford Income fund and doesn’t affect trading in the trust that we own, the ripple effects to the trust could be significant and need analysing. These effects are three-fold:
- Impact on the trust’s NAV
For investors, this should be the key focus at present. What impact, if any, will the suspension of trading in the Income fund have on the assets in WPCT?
Woodford have made clear that they will now accelerate their plans to take the unquoted positions in the Income fund down to 0% (their original plan was to do so by the end of the year). Given that there is ~75% overlap between the unquoted holdings in the Income fund and in WPCT, there is an obvious risk that any forced selling of those holdings could impact their value in WPCT.
Our view at this stage is that, while certainly in the open now, the Income fund has been a forced-seller of its unquoted holdings for at least 20 months. The situation won’t be easier now but they have been able to liquidate some of their previous holdings recently at a premium, which is encouraging. After talking to Woodford yesterday, we were also reassured to hear that they have long-established and thought-through plans in place to fix this particular problem and aren’t acting in a panic.
As we mentioned in the past, after having met management of several of the key holdings in WPCT, we truly believe that the trust is composed of a strong stable of companies at or close to an inflection point in realising their potential. Recent events don’t change that fact.
- Impact on the trust’s price
The announcement of the trading suspension initially sent WPCT’s price down more than 20%, before it recovered to close down 7%. This type of knee-jerk reaction is a continuation of the negative impact on sentiment press reports have had over the past couple of years. As now, the press has focused on the structural issues within the Income fund and its poor performance, as opposed to WPCT itself. We have used this negative impact in the past to build up our position in the trust at what we deemed very attractive levels of discount to NAV and to the quality of assets that are held in the trust.
The discount on the trust has widened a lot this week, now standing at close to 21%, its highest ever. In situations like these where sentiment can snowball and take a life of its own, there is no way to say with certainty where the floor should be for the discount. One can argue though that it makes WPCT potentially attractive to deep value managers looking for a turnaround. At current levels, it would also make it much easier for the Income fund to buy more shares in the trust to replace its unquoted holdings. Investors in the Income fund should feel happier to buy at current prices than at par as they did a few months ago when the firm swapped a few unquoted companies for shares in WPCT.
- Impact on the trust’s management
In the worst-case scenario, we also have to consider the possibility that Woodford Capital Management goes under and is forced to close if assets keep flowing out at an alarming rate once the Income fund reopens. One of the advantages of being invested in an investment trust -other than offering the manager permanent capital thus avoiding the issues that the Income fund is currently going through- is that the Board of the trust is ultimately accountable. They oversee the management of the trust and decide who will be managing it. This means that WPCT wouldn’t necessarily be liquidated if Woodford Capital Management went under as a new manager could be appointed.
In reality, this would be a very difficult decision for the Board to take and there aren’t many potential candidates with the expertise, calibre and talent of Woodford to manage WPCT. This is a situation that we hope we won’t have to face but, at least, the assets in the trust itself would be protected and continued to be managed for the best interest of investors. Even in the event of the trust being wound up, we would expect to receive a return close to the true NAV -currently standing at 90p-, giving us a 32% upside from here.
The current situation with the suspension of the Woodford Income fund is a regrettable one. Having analysed the information at our disposal and talked to Woodford Capital Management, we are holding onto our position in the WPCT. We remain convinced of the strength of the portfolio and the great opportunity for the value in many of the holdings to come to fruition over the coming months. The current events are forcing us to deal with the “noise” and we are very actively monitoring new developments.
These views are the views of the Wise Funds team and are not to be considered as investment advice. Full details of the TB Wise Funds, including risk warnings, are published in the TB Wise Funds Prospectus, the TB Wise Supplementary Information Document (SID) and the TB Wise Key Investor Information Documents (KIIDs) which are available on request and at wise-funds.co.uk/our-funds The TB Wise Funds are subject to normal stock market fluctuations and other risks inherent in such investments. The value of your investment and the income derived from it can go down as well as up, and you may not get back the money you invested. Capital appreciation in the early years will be adversely affected by the impact of initial charges and you should therefore regard your investment as medium-to-long term. Every effort is taken to ensure the accuracy of the data used in this document but no warranties are given. Wise Funds Limited is authorised and regulated by the Financial Conduct Authority, No. 768269. T. Bailey Fund Services Limited is authorised and regulated by the Financial Conduct Authority, No. 190293. Wise Funds is a trading brand of The Oak Investment Partnership