Woodford Patient Capital to issue new shares: should you buy?
The investment trust from superstar fund manager Neil Woodford is to issue millions of new shares. What does this mean for new and existing shareholders?
Four months after star fund manager Neil Woodford launched his Woodford Patient Capital Trust (WPCT), it has been announced that millions more shares will be issued to meet demand from eager investors.
What will this mean for new and existing shareholders - and will this step make the shares more or less attractive to own?
Woodford Patient Capital shares trade at a premium
Most of Woodford's previous funds have been unit trusts or OEICs, which can vary the number of units they have in issue by cancelling and issuing units from time to time. However, Woodford Patient Capital is an investment trust, which means that is a listed company in its own right and has a fixed number of shares in issue.
As a result the share price of the trust can move up and down in line with investor demand, as well as being driven by underlying assets. This means that, as with other investment trusts, the shares can (and currently do) trade at a premium to their underlying assets.
At present, the trust has 800 million shares and, at the current share price of 116p, it is valued at £928 million. However, the trust's underlying assets are worth only £832 million. This means that the trust's shares trade at a premium of roughly 11.5% above their net asset value (NAV).
The problem for would-be shareholders in WPCT right now is that buying shares at a premium means, in effect, overpaying to buy the trust's underlying assets.
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Up to 80 million new shares are on the way
In its half-yearly report issued this week, Woodford Patient Capital unveiled plans to issue new shares through what is known as a 'tap issuance' programme.
Although the number of shares to be issued through this drip-feeding process has not been stated, it could be up to 10% of the number currently in issue. In other words, up to 80 million shares - worth £92.8 million at today's price of 116p - could be released to meet market demand over time.
By releasing new shares into the market, WPCT does two things. First, it meets excess demand from new investors and existing shareholders wanting to buy more shares in the trust. Second, it will help to bring down the trust's premium to NAV over time.
The bad news for existing shareholders is that the announcement sent WPCT's share price down 3.3p, or 2.8%. However, this price drop is good news for shareholders waiting patiently to buy, because a lower share price also means paying a lower premium.
However, over the longer term, issuing new shares only at a premium to NAV, but below the market price, will help to build up the underlying value of the fund. This is because investors will still pay over the odds to buy into the fund's underlying assets.
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What has Woodford Patient Capital done so far?
Neil Woodford, one-time star stock-picker at fund manager Invesco Perpetual, likes to keep things simple. The stated goal of the Woodford Patient Capital Trust is quite straightforward: "To achieve long-term capital growth through investing in a portfolio consisting predominantly of UK companies, both quoted and unquoted. The Company will aim to deliver a return in excess of 10% per annum over the longer term."
In Woodford's own words today, his team looks to "identify and invest in innovative, disruptive, typically science-based businesses at attractive valuations". Nearly three-quarters of the £800 million raised in April has been invested, with the remainder expected to be fully invested by end-2015.
WPCT's portfolio is dominated by holdings in smaller healthcare and biotechnology businesses, with the trust's top-10 holdings accounting for more than a third of the portfolio. However, the trust also holds some blue-chip FTSE 100 shares (including AstraZeneca, GlaxoSmithKline, Legal & General and Rolls-Royce) and some mid-cap FTSE 250 shares (such as Allied Minds and IP Group).
A solid start for Woodford
Investors who bought shares for £1 in the flotation are sitting on a tidy profit of 16% at the moment. However, most of this has come from the elevated premium due to keen demand in the secondary market.
In fact, with the latest published NAV per share standing at 103.6p, the trust's assets have increased by a mere 3.6% since launch. Then again, this is more than enough to cover the trust's initial charge of 1.5% and annual management charge of 0.15%.
The Woodford Patient Capital Trust has got off to a decent start, with NAV rising in line with the UK All Companies benchmark and the rising share price producing double-digit returns for IPO investors. Of course, Woodford's investment goals are long term, so what really matters is how the fund performs over, say, the next decade or so. Watch this space.
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