What is Neil Woodford doing?

Barratt Developments: Woodford’s a fan
The much-celebrated fund manager is testing the patience of his investors.

Former star fund manager Neil Woodford has stirred up controversy yet again this week, after his Woodford Equity Income fund swapped five of its unlisted stocks for shares in Woodford’s Patient Capital Investment Trust.
On the one hand, the move makes sense. It was always odd to have an equity income fund investing some of its money into unquoted companies that pay no dividends. It also makes a lot more sense to hold these sorts of illiquid assets within an investment trust that specialises in early stage companies, than within an open-ended fund. The latter can run into problems with illiquid assets if too many investors want their money back at once, which is almost certainly another factor behind the move, as we’ll get to shortly.
On the other hand, you can see why investors in the equity income fund might be upset. Like many investment trusts, Patient Capital trades at a discount to its net asset value (NAV – the value of the underlying portfolio). At the time of the deal, this discount was 13%. So if you had bought the shares in the open market, you’d have paid around 87p for every £1 of NAV. Yet the fund didn’t do this – instead it paid the equivalent of the NAV for each share.
In other words, it overpaid by about 15%. Woodford and his representatives argue that the alternative (buying the shares in the market) would have been too expensive and time-consuming, and that they’ve paid “what the trust’s assets are actually worth” – but investors who were already wavering could be forgiven for considering this the final straw.
A big past to live up to
After a highly successful career at Invesco Asset Management, Woodford set up on his own in 2014, taking many of his previous clients with him to his new company, Woodford Investment Management. When it first launched, the equity income fund had 51 holdings, many in big dividend-paying names like BT and GlaxoSmithKline. And at first, it did well, with a total return of 20% in its first year, versus 6.5% for the FTSE All-Share.
However, performance has deteriorated since, with the fund underperforming in each of the last three years. Unsurprisingly, this underperformance prompted investors to withdraw their cash – the amount of money invested in Woodford Equity Income has more than halved to below £5bn since launch – meaning that Woodford had to sell holdings in order to meet investor redemptions.
Given that it’s harder to sell shares in unlisted companies quickly, this has meant that Woodford has had to sell down some of the portfolio’s larger, more liquid holdings. As a result, the portfolio has ended up being much more heavily-weighted to smaller, riskier companies. At one point, the portfolio was more than 50% invested in FTSE 100 stocks; this proportion is now less than 20%.
Faith isn’t always enough
So if you are invested, should you hold on? Woodford’s firm maintains the fund is well-positioned for a post-Brexit Britain, having spent the past 18 months focusing on UK domestically-exposed equities. Yet while UK housebuilder Barratt Developments is the second-largest holding, the top ten still includes a US-listed, loss-making biotech and an unlisted artificial intelligence group. This strikes us as neither a traditional income fund, nor a contrarian play on Brexit.
If you still have faith in Woodford, hang on. If, instead, you’re looking for a reliable income, you might look at the Troy Trojan Income fund, which yields 4.4% and topped insurer Sanlam’s latest list of UK equity income funds.
Or if you specifically want to invest in early-stage life-sciences firms, you may instead choose to wait for shares in investment trust Syncona (LSE: SYNC), which has done very well in recent years, to trade at a lower premium to NAV (the premium is currently a massive 35%).
Activist watch
Hedge fund Barington Capital has built up a small stake in Victoria’s Secret owner L Brands, and is urging the company to consider splitting its “booming” Bath & Body Works division from the struggling lingerie chain, says Cara Lombardo in The Wall Street Journal.
The activist investor has written to L Brands’s chief executive and chairman, Leslie Wexner, arguing that Victoria’s Secret could be “rejuvenated” by improving merchandise and updating its branding, and calling for board directors, including those with tenures of longer than 30 years, to be replaced. Wexner, who founded and has run L Brands for more than 50 years, controls roughly 17% of the shares. By contrast, Barington Capital owns under 1% of the company.
Short positions… cannabis ETF gets high
• Listed life-sciences fund Syncona is set to make £254m after Swiss biotech company Biogen agreed to buy its third-largest holding, Nightstar Therapeutics, for a “knockout” £633m, says Gavin Lumsden on Citywire’s Investment Trust Insider. Shares in the eye-disease specialist floated on US technology exchange Nasdaq 16 months ago, and soared by 66% when news of the bid broke.
Biogen’s offer of $25.5 per share represents a 70% premium to Nightstar’s recent share price, though it is below the $26.42 peak hit last September. Syncona, which owns a 38.8% stake in Nightstar, has achieved a 4.5-times return on its £56.4m investment in the company. Syncona will not return any of the money to shareholders, but will use it to make further investments in its portfolio of 13 holdings and pipeline of new companies. The acquisition is also good news for fund manager Neil Woodford (see above): his equity income fund holds 0.25% of its assets in Nightstar.
• The world’s first cannabis exchange-traded fund (ETF) is set to become the second-most profitable ETF in Canada, says the Financial Times. The Horizons Marijuana Life Sciences Index fund has returned more than 50% so far in the year-to-date, amid a frenzy for cannabis-related stocks. The fund’s high annual management charge (0.75%, high for an ETF, particularly compared to more general trackers) and ability to earn fees from lending stock (for cannabis sceptics to short-sell) means it is fast catching up to Canada’s most profitable ETF, which is five times larger.

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