UK Edition
Questor: why we are selling Woodford Patient Capital – and what we are buying instead
Questor investment trust bargain: it’s time to redeploy money to an investment trust that offers a better prospect of future growth
The time has come: we are pulling the plug on Woodford Patient Capital.
Why have we run out of, well, patience? It’s quite a list but the first reason is simply that we think the shares have further to fall.
At first sight, the discount of 34.3pc offers a decent margin of safety in the event of more bad news. But the discount is not all it seems.
Any investment trust discount is based on the net asset value or NAV. If a fund holds quoted stocks, calculating the NAV is straightforward. But if it owns mostly unlisted ones, as Patient Capital does, arriving at a figure is more art than science.
A variety of techniques can be used, such as employing expert valuers or using the price paid for the shares when they were last issued to raise money, but these approaches give nothing like the precision of an actual quoted share price.
When a trust owns quoted holdings you could expect to receive roughly the NAV if the fund were liquidated. When the holdings are unquoted, there can be no such confidence.
If we also bear in mind that immature businesses, such as those in Patient Capital, are inherently more unpredictable than established ones, we can have even less certainty about what the NAV will be in future. Several of the trust’s holdings have had their values written down in recent weeks and the fear has to be that others will follow suit.
Should the trust’s NAV fall further, it is all but inevitable that the share price will do the same.
But there is another good reason for us to sell: we have simply lost faith in Neil Woodford. His sale of about £1m of his own shares in the trust in July didn’t help, but this column now sees the evidence as overwhelming that his attempt to build a successful stock-picking business centred on his own abilities has failed.
Whether this is because he overreached himself by running three funds without recruiting sufficient backup, or because, given that he founded the business, those around him felt unable to offer constructive challenge to his opinions, we don’t know.
But both his bread-and-butter equity income funds and his bold new venture in the form of the “venture capital” investment trust have come unstuck and it seems to Questor that too many mistakes have been made in connection with individual holdings for his performance to be dismissed as just a run of poor form.
While we realise that readers who follow our advice now will crystallise a loss of 53.7pc on our tip at 93p in January 2017, we have a suggestion for those who remain attracted to the idea of a trust for up-and-coming hi-tech British firms.
- Read Questor’s rules of investment before you follow our tips
Syncona specialises in the healthcare sector and has a larger and more experienced management team than Woodford Patient Capital. It has looked dizzyingly expensive at times but the shares are now well below their peak of 302.5p a year ago and the premium is 6.8pc, compared with a high of 50pc in August last year.
If we can use the proceeds from a cut-price Patient Capital to buy some cut-price shares in Syncona, perhaps we can limit the damage caused by our original backing for the former – and get exposure to a trust that offers a better chance of gains in future.
Some professional investors have told Questor that they may be tempted to try their luck with Patient Capital if the shares fall as low as 30p but that course of action is only for the bravest. For now, cut your losses.
Questor says: sell Woodford Patient Capital, buy Syncona
Tickers: WPCT, SYNC
Share prices at close: 43.1p, 215p
Update: Phoenix Spree Deutschland
Shares in this trust, which had already been hit by proposals for a rent freeze in Berlin, where it owns apartment blocks, fell further in late August when reports emerged that local politicians planned rent cuts, not just a freeze. But following a backlash from other parties, rent cuts seem off the agenda and the shares have recovered those losses and more.
Questor says: hold
Tickers: PSDL
Share prices at close: 306p
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.