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Investment Trust Watch: poorly Patient Capital looks 'cheap'

Investment Trust Watch: poorly Patient Capital looks 'cheap'

Analysts at Stifel last week warned that shares in the Woodford Patient Capital (WPCT) investment trust could fall to a double-digit discount to net asset value (NAV), and investors made a good go of helping them reach that dubious landmark this week.

Shares in the trust on Wednesday fell to their biggest-ever discount of 8.3%, and although that has since been trimmed to 7%, that's still much higher than the 2% average discount over the last 12 months. That gives the trust a Z-score of -1.6.

Just to recap a Z-score is a measure used by analysts to indicate whether a trust’s valuation is outside its normal range. Roughly speaking a Z-score of 2 or more is considered ‘dear’ while a score of -2 or below is getting cheap.

'Cheap' trusts Share price premium (-discount) to NAV % 12-month average premium (-discount) % Z-score
Damille Investments II (DIL2) -26.2 -13.1 -3.2
Ranger Direct Lending (RDL) -24.3 -11.4 -3.1
TOC Property Backed Lending (PBLT) 2.5 5.0 -2.3
Juridica Investments (JIL) -49.0 -23.7 -2.3
Qannas Investments (QIL) -6.3 -1.6 -2.3
Aurelius Equity Opportunities (AR4) 1.5 32.6 -2.1
Drum Income Plus REIT (DRIP) -0.1 8.7 -2.0
NAXS Nordic Access Buyout (NAXS) -15.0 -9.7 -1.8
JPMorgan Brazil (JPB) -17.1 -11.6 -1.7
Lindsell Train IT (LTI) 23.4 45.6 -1.7
-7.0 -2.1 -1.6
Myanmar Investments (MIL) 40.4 52.1 -1.6
Funding Circle SME Income C (FCIC) 1.3 1.8 -1.6
Boussard & Gavaudan - £ (BGHS) -22.3 -19.7 -1.5
GLI Finance (GLIF) -47.9 -38.7 -1.4

Source: Numis 12/5/17

Investors appear to be growing impatient with the trust, now two years old, whose shares have fallen 9.2% since launch, while the net asset value has barely budged from its 98.5p level, now standing at 97.6p.

Adding to the angst for some investors is the fact those lacklustre returns have been delivered against a backdrop of rallying markets, over the last year in particular. The Patient Capital trust's focus on early-stage companies may set it part from most of its peers in the UK All Companies sector, but so do its returns, with a 5.8% loss over the last 12 months contrasting with an average 15.2% gain.

Of the 468 investment trusts across all sectors with a one-year track record, only 18 have delivered heavier losses over the last year.

All of which means star fund manager Neil Woodford is going to have to deliver a pretty spectacular upturn in performance if he is going to earn any money for running it anytime soon.

One of the trust's selling points at its launch was its innovative performance fee structure, which sees Woodford paid only if he can deliver an NAV return of more than 10% in a year. But a return of more than 10% in any given year on its own will not suffice. Instead, Woodford needs to beat a 'hurdle' which rises by 10% each year, and the losses he has incurred so far mean the gap he needs to make up is widening.

Woodford's first opportunity to earn a fee came at the end of 2015, in a shortened financial year for the trust covering the period from its launch on 21 April. To earn his fee, the manager had to deliver NAV per share of 106.96p (based on a pro rata calculation of the 10% annual hurdle over eight months). However, by 31 December the NAV stood at around 97p per share, well below that.

Last year's hurdle was also missed. It was set at 10% more than 2015's target, or 117.65p, but the NAV by the end of the year stood at 93.2p.

If Woodford is going to gain a fee next year, he'll need to clear a hurdle of 129.42p. In other words, he'll need to deliver a return of more than 32.6% in the next seven months.

Woodford is staying bullish, saying in the trust's annual report released last month that he believes the investment rationale for the trust is 'stronger than ever'.

But if he's going to mastermind an upturn in fortunes, and earn some money for his work, he's going to need a few more investments like Purplebricks (PURP), the online estate agent whose shares have rocketed 267% since listing less than two years ago, and a few less like Northwest Biotherapeutics (NWBO.O), down nearly 99% from a 2015 peak amid allegations of fraud.

'Expensive' trusts Share price premium (-discount) to NAV % 12-month average premium (-discount) % Z-score
BlackRock Emerging Europe (BEEP) -6.4 -11.6 4.2
JPMorgan European - Income (JETI) -4.2 -11.1 3.2
Electra Private Equity (ELTA) -4.4 -52.0 3.2
JPMorgan European Smaller Companies (JESC) -9.2 -14.8 3.1
Mithras IT (MTH) -1.1 -11.3 3.0
Montanaro European Smaller Companies (MTE) -10.0 -16.2 3.0
Target Healthcare REIT (THRL) 18.1 11.1 2.8
Kubera Cross-Border (KUBC) -33.0 -59.9 2.8
3i Group (III) 52.8 23.2 2.8
Phaunos Timber (PTF) -12.3 -20.0 2.6
Miton Global Opportunities (MIGO) -1.0 -6.6 2.5
European IT (EUT) -9.3 -14.1 2.5
DeA Capital (DEA) -23.4 -41.1 2.5
TR European Growth (TRG) -8.2 -14.3 2.4
Altamir Amboise (LTA) -24.0 -37.4 2.4

Source: Numis 12/5/17

Turning to expensive trusts, where European funds dominate our second table (above), as the region's strong performance this year continues to draw investors back. This has been seen among open-ended funds, which enjoyed £141 million of net inflows in March, contrasting with average outflows of £337 million a month over the previous year.

The same buying pressure among investment trusts has seen four mainstream funds enter the 'expensive' list, with the average discount on shares in the sector just 5.6%, down from 15.9% in the aftermath of the Brexit vote.

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