Shares in Woodford Patient Capital Trust (LSE: WPCT) have lost more than 15% of their value since the troubles with manager Neil Woodford’s flagship Equity Income fund came to light on Tuesday. Could a similar problem to that afflicting the fund affect the investment trust?
There’s a key difference. With the Equity Income fund, investments have to be sold to give clients their money back, and the fund has a lot invested in illiquid and unquoted stocks, making that a bit tricky. And its liquid investments are already significantly diminished after the withdrawal of £560m in the past month or so.
Investment trust
That doesn’t happen with an investment trust, which is a closed-end fund and is immune to client selling. No cash is ever added to or withdrawn from it, and investors simply buy and sell shares in the fund instead. What happens if shareholders want to sell and run for the hills? If there are more sellers than buyers, the share price will simply fall in order to attract buyers.
But the underlying value of the fund remains the same, as its investments remain intact. Well, within reason, as a number of Patient Capital’s holdings have also dropped as part of the fallout. But generally, what happens when an investment trust’s shares fall in price is that you can buy them for less than the value of the underlying investments they represent.
Looking cheap?
Woodford Patient Capital Trust shares are now trading at a discount to the trust’s net asset value (NAV) of a shade under 25%. What that means is that you can buy the rights to £1-worth of investments (at current asset valuations) for approximately 75p. We have to bear in mind that investment trusts frequently trade at discounts to NAV, but rarely to this extent.
There are possible downsides. One of Woodford’s key points about this trust is that, in an innovative move, he doesn’t charge management fees. But there is increasing speculation that this approach will not be sustainable and that charges could be coming soon. Still, as several commentators have pointed out, at least shareholders haven’t had to pay for the poor performance of the trust since launch.
Putting aside the past week’s woes, Woodford Patient Capital shares have been underperforming for years. The trust share price remained ahead of the FTSE 100 for the first year or so, but since launch in 2015, the share price had fallen by more than 25% even before the latest shock revelation (compared to a 3% gain for the Footsie). After this week’s news, we’re looking at a 40% loss.
What do to?
With the current depressed mood, it’s possible there’s a bargain to be had here, but it’s all down to the actual value of the underlying assets. With quoted and liquid shares, that’s relatively easy to ascertain. But when it comes to unquoted firms, and illiquid and unprofitable start-ups, it’s hard to put any reliance on NAV as in many cases it’s a very subjective assessment.
My colleague G A Chester recently looked at this very problem, and I recommend reading his words before you think of buying Woodford Patient Capital shares.
Me? I don’t like hard-to-value investments, and I would never have invested in the first place.