Questor: Woodford and Darwall’s trusts are both under pressure. Which is a sell?

Richard Evans 7 March 2019 • 5:52am

Questor investment trust bargains: Neil Woodford’s trust has just swapped assets with his fund, while Jupiter European Opps has problems with its largest holding

Two of Britain’s most high-profile investment trust managers, Neil Woodford and Jupiter’s Alexander Darwall, have suffered significant reversals of fortune recently. The trusts they manage, Woodford Patient Capital and Jupiter European Opportunities, are both currently rated as buys by Questor. Here we take another look at the two trusts to see whether either or both should be sold.

Update: Woodford Patient Capital Trust

Last week the trust announced the acquisition of a number of unquoted assets from Neil Woodford’s flagship open-ended fund, Woodford Equity Income, in exchange for shares in the trust. The fund also bought some newly issued shares in the trust for cash.

The five stocks transferred from the fund to the trust, after an independent valuation, are two financial services “disrupters”, Atom Bank and RateSetter; two cancer treatment start-ups, Carrick Therapeutics and Cell Medica; and a computer memory firm, Spin Memory. All were already held by Woodford Patient Capital but the deal gives the trust larger stakes in all five.

A key aspect of the transaction is that the new shares issued to Woodford Equity Income to pay for the stocks were priced at the trust’s net asset value (NAV) rather than the share price at the time. As the shares now trade at a double-digit discount, this was advantageous for the trust: it had to issue fewer new shares to pay for its new holdings than it would if the share price had been used.

The new shares sold to the fund for cash give WPCT scope to take part in future funding rounds by its holdings, avoiding or reducing possible dilution in its stakes in those firms. Even after the transaction the open-ended fund retains substantial stakes in unquoted businesses and further deals of the same sort are possible.

Questor archive: telegraph.co.uk/questor

Peter Hewitt of BMO, the fund group, who holds a stake in the trust, told Questor: “For a WPCT shareholder overall the deal is a slight positive. The trust gets bigger exposure to some interesting companies, especially Atom Bank, paid for with shares issued at NAV, whereas the current share price is on a 15pc discount.”

He added: “There is massive negativity about Woodford generally at the moment. I am not swayed by that and am focused on the evidence from the underlying companies in the trust and in this regard there is real progress.”

Questor’s take is simply that the trust has increased its stake in some of its holdings at a reasonable price. It remains a high risk, high potential reward vehicle for long-term investors.

Questor says: hold

Ticker: WPCT

Share price at close: 80.6p

Update: Jupiter European Opportunities

We tipped this trust, managed by Alexander Darwall, at 524p in December 2016 and the shares have gained 37pc since then at their current price of 714p. However, they were as high as 895p in August last year. Much of the recent weakness has been caused by negative stories about the trust’s biggest holding, a German payments company called Wirecard, which started to appear at the end of January.

After the Financial Times published allegations of financial wrongdoing Wirecard’s shares fell from about €168 to the current level of €118. They might have fallen further had the German regulator not banned short selling in the stock. Wirecard has denied the allegations.

At the end of January the company accounted for 16.1pc of the trust, so the latter’s share price has also suffered: it has fallen from 752p on Jan 29, just before the first reports appeared, to as low as 675.5p on Feb 8, before a partial recovery.

In the trust’s most recent interim report, published last month, Darwall said: “We have never had cause to doubt the company [Wirecard]. Until and unless there are substantive and substantiated charges we remain confident that the company is strong and well placed to prosper.”

None the less Questor feels uncomfortable about any relatively mainstream fund putting so much of its money in one stock. For comparison, Woodford Patient Capital, an avowedly high-risk vehicle, has 9.2pc in its largest holding. We will take profits on the Jupiter fund.

Questor says: sell

Ticker: JEO

Share price at close: 714p