Neil Woodford’s new fund: keep a cool head

Neil Woodford, Britain’s best-known fund manager, has released the prospectus for his new fund, the Woodford Patient Capital Trust (LSE: WPCT). As previously announced, this fund focuses on unlisted companies at an early stage in their development.

The idea is that Woodford will be able to use his experience to identify those that will grow at a fast rate and produce attractive investment returns. Around a quarter of the fund will be invested in low-risk stocks that will pay dividends to fund the estimated running expenses of 0.35% per year.

Perhaps the most notable element of the fund, apart from its objective, is the fee structure. Woodford had already announced that he will be taking only a performance-based fee, not an annual management fee. The prospectus spells out the full details. Woodford will earn 15% of any excess returns over 10%.

For example, if the fund returned 25%, he would get 1.5% (15% of the 10% excess). However, he would get nothing if it returned less than 10%. To align his interests further with those of investors, Woodford will be mostly paid in shares in the fund, which he will have to hold for a year.

One twist is that the returns will be calculated in terms of the value of the fund’s net assets, not the performance of the share price.

Of course, the value of shares in unlisted companies is subject to uncertainty – since there is no public market price – so the fund will be employing advisory firm Duff & Phelps to provide an independent third-party valuation for this purpose.

The fund is not intended to take on long-term debt, but Woodford will temporarily be allowed to borrow up to 20% of assets. This will allow him to bridge the gaps between investments and asset sales. The fund will be eligible to be held in an Isa.

Overall, this may be an interesting opportunity for those who want to invest in this part of the market, and provide a cheaper alternative to more conventional private-equity-focused funds.

However, despite Woodford’s experience, the idea remains unproven. And given the degree of excitement, it’s likely that the fund will trade at a premium to assets after it launches on 21 April. At this stage, investors should trade carefully and limit their exposure.

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