Woodford Patient Capital Trust

This morning, the ACD (Authorised Corporate Director) for the Woodford Equity Income Fund (WEIF) announced that the fund will close down and that Woodford Investment Management had been fired as a manager of the fund. WEIF had been suspended for trading since June and the ACD has apparently been disappointed by the progress made so far by the manager in increasing liquidity to allow for a re-opening. This was previously planned for December.

This announcement and its timing came as a surprise and materially increases the risks for our holding in the Woodford Patient Capital Trust (WPCT) in the TB Wise Multi-Asset Growth fund.

We have been vocal in the past about how strong we think the assets in the trust are. In the summer, while our view on those underlying assets didn’t change, we reduced our allocation to WPCT in order to mitigate the impact of daily volatility on our portfolio. Our sense was that, on balance, the trust would survive and keep being managed by Woodford (our preferred scenario) or, in the instance where Woodford were to fold in this crisis, would be taken over by another manager. This latter scenario would have helped refocus investors on the assets in the trust as opposed to its manager and remove the damaging uncertainty weighing on the trust’ price.

Unfortunately, the closure of WEIF changes the situation for WPCT on three fronts:

  1. The survival of Woodford IM is now more clearly in doubt. Without the prospect of any management fees from WEIF and, since no management fees are charged on WPCT, it is hard to see how the firm will cover its operational costs. We mentioned to the Board this summer that we thought Woodford should start charging a management fee on the trust in order to take away that risk, but this hasn’t been actioned yet and is now unlikely to be so. Even with a very reduced assets size, “a” business (if not “the” business as currently exists) could have been viable purely with the management of the trust.
  2. The closure of WEIF will directly weigh on WPCT’s assets and share price. Firstly, there remains a number of unquoted stocks in WEIF that are also held in WPCT. The fact that WEIF was a forced seller of those assets isn’t new. The ACD had given the manager time to sell those assets though, thus limiting the downside pressure. This is no longer the case and one can only expect the forced selling to intensify. This will also put pressure on the gearing in the trust, already close to the maximum permitted. Secondly, WEIF holds 9% of WPCT’s shares. Those will need to be redeemed too, weighing on the price of the trust.
  3. Finally, the Board of WPCT is now firmly on the back foot. As they haven’t found a new manager for the trust yet, the possibility of them doing so in the short-term has shrunk. Conversely, this increases the risk of the trust itself being liquidated, a process that could take months to execute given the illiquid nature of its holdings and thus creating uncertainty and illiquidity for investors in the trust.

All in all, we believe that today’s announcement significantly increases the risk in WPCT. We thus decided, reluctantly, to liquidate our entire position for the TB Wise Multi-Asset Growth fund. This was completed this afternoon.

This represents a great disappointment for us. We believe that our assessment of the holdings in the trust, of the manager’s skills in managing these types of assets and of the structure of the investing vehicle itself were broadly correct, as was our initial entry point, a long time away from the hype that surrounded the launch of the trust. However, we clearly underestimated the impact large outflows in the WEIF could have on WPCT itself and will certainly learn from this lesson.

Cutting losses is never an easy thing to do. Despite all the above, there is now a not completely remote chance that the Board or the manager of the trust will pull out a rabbit out of their hats (new manager, restructuring of Woodford IM, quick liquidation?…), which would make our decision to sell today look stupid in hindsight. A classic case of capitulation at the worst possible moment. However, a fund manager’s role is to weigh risks and rewards and we now believe, objectively, that the scale is clearly tilted towards the risk side.

Overall, this position cost the fund about 1.8% since inception in March 2018. For that, we can only apologise to our investors.

If you have any questions, please do not hesitate to contact us directly.

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