Neil Woodford’s new Patient Capital Trust is now open for subscription. The credentials and past success of Mr Woodford, and the innovative nature of the new fund, should make it highly popular with investors. But is it right for you?
10% p.a.
The fund’s objective is certainly attractive. Mr Woodford will target returns of 10% per annum in the long term. The clue is in the name: this is a fund for patient investors. But this fund is very different from Mr Woodford’s Equity Income Fund — or any other equity income fund, which typically invests in boring large-cap companies paying reliable dividends but with modest growth potential.
In contrast, Patient Capital will focus on small, emerging growth companies. Its target portfolio is:
- 50% in ‘early-stage’ companies;
- 25% in ‘early growth’ companies;
- 25% in mid/large caps.
‘Early-stage’ companies might be quoted or unquoted and “are normally pre-revenue and pre-profit”. This is venture capital in all but name. ‘Early-growth’ companies are likely to be already quoted, and will have started to commercialise their inventions. They are less at risk of failure, whilst still offering fast growth prospects. The quarter of the fund devoted to mid and large caps will provide ballast and income.
What, no fees?
There’s another innovation from Mr Woodford: Patient Capital will not change an annual management fee, except for ongoing costs expected to be around 0.35% p.a. Instead, the manager will be remunerated by a performance fee only payable when the cumulative return of the fund exceeds 10% p.a. — then the manager will cream off 15% of the excess over 10% p.a.
Traditionally, performance fees have smacked of greed, but combined with the absence of a recurring fee it is a remarkable sign of confidence, aligning the manager’s interests with those of investors. It suggests Mr Woodford hopes to exceed the 10% target.
Obviously, this kind of investment is much higher risk than large quoted companies, but Mr Woodford is an experienced investor in early growth companies. For many investors, I think this could be an interesting low-cost fund to hold alongside a more traditional FTSE 100Â tracker, which, by definition, is wholly comprised of large caps.
There is much to fault in the FTSE 100 index: it has taken longer than most to recover its pre-financial crash highs, bogged down by over-exposure to oil, miners and banks. But it’s an easy way for most investors to obtain a pure play on the market, and has returned a decent 9.8% and 9.2% p.a. over the past 3 and 5 years respectively.