Neil Woodford has attacked Kerrisdale Capital, the US hedge fund seeking to undermine one of the top holdings in the Woodford Patient Capital Trust (WPCT), saying its claims about Irish biotech company Prothena are ‘totally inaccurate and unsubstantiated’.
Since November when Kerrisdale issued a critical 29-page report on Prothena (PRTA.O) explaining why it was shorting the shares in order to profit from a fall in the share price, the US Nasdaq-listed stock has tumbled nearly 28% in dollar terms.
New York-based Kerrisdale predicted trials on Prothena’s main drug under development - an antibody used to treat a rare disease called amyloidosis - would probably fail and that the company would be ‘the next big biotech blowup’.
Kerrisdale and its founder Sahm Adrangi have form against Woodford. Three years ago the firm forecast that shares in Allied Minds, a technology venture capitalist and another of the fund manager’s long-term holdings, would fall, claiming many of its investments were ‘duds’. From their peak of 725p in April 2015 Allied Minds (ALM) shares have plunged 77% to 165p. Last year the company replaced its chief executive and cut the number of start-ups in its portfolio.
Woodford has previously defended the prospects of both companies but speaking at an investment conference yesterday he turned his fire on Kerrisdale.
’Their job is to scare the market when the market is prepared to be scared. It doesn’t matter if what they said about Allied Minds and Prothena is totally inaccurate and unsubstantiated,’ he told investors at the Winterflood Securities event in London.
‘What matters is Bloomberg and others giving them the oxygen of publicity and hey presto there is a self-fulfilled prophecy and the share price falls.’
The drop in Prothena’s share price has cost it its top spot in the Patient Capital portfolio. From being the biggest holding at over 16% of assets in October it dropped to number two at 9.2% by December, behind Oxford Nanopore, an unlisted university seeking to revolutionise DNA analysis.
Neil Woodford interviewed by Citywire chairman Lawrence Lever last year
Woodford’s outburst comes at a challenging time for the UK’s best-known fund manager. After quitting Invesco Perpetual over four years ago, Woodford set up his own business, attracting billions from eager investors. However, in the past year the optimism has faded as all three of his funds have suffered a downturn in performance as key holdings have struggled. This includes the Woodford Equity Income fund which also invests in Prothena.
Woodford Patient Capital - an investment trust focused on early stage healthcare and technology companies - has fared the worst. After its own bright start in 2015 when Woodford raised a record £800 million, the shares have fallen over 17% to 83.4p, having shed 7% last year and 9.75% in 2016. At their peak in August 2015 they stood at a 15% premium over net asset value (NAV) but have declined to trade at an 8.7% discount to NAV.
The falls in the value of the underlying portfolio of 81 companies have been smaller, however, and the trust has enjoyed some successes, mostly notably from online estate agent Purplebricks (PURP), whose shares soared 194% in 2017, according to Woodford Investment Management.
Nevertheless, Woodford starts the new year under pressure to demonstrate progress in its core medical research holdings. He was confident that Prothena, whose shares have rallied 20% since the new year, would publish successful trial results in the second quarter and that there would be good news from other investments.
’The next 6-12 months should see some important inflexion points. We are very confident about the portfolio,’ he said. Many of the companies were ‘on the cusp’ of a breakthrough, he added.
Part of Woodford’s problem is that around 60% of the portfolio is in unquoted stocks, whose valuations only change occasionally when there is a significant event. This means the trust has lagged the rising bull market of the past three years.
‘Share prices don’t tell you what is going on in a business. The fact is the market is inefficient - particularly when there is a speculative, momentum asset-based bubble,’ Woodford said.
Woodford said it was unfortunate that the environment had been hostile for the trust with both the healthcare and quoted biotechnology sectors enduring bear markets in the past two years. He also railed against the obsession with short-term performance that he said ‘crippled’ the investment industry.
‘The market has been anything but patient. But we’ve been patient in deploying the capital,’ adding that he would never pull the rug out from under a company that deserved his support.
He claimed all successful technology companies faced a ‘pivot’ moment in their development when they had to revisit the assumptions on which their businesses were based. It was the job of fund managers to support companies through this process, he said.
Woodford also gave an insight into the process of valuing the private, unlisted companies in the fund. He said ‘multiple’ levels of discount would be applied to the future cash flows expected from a company. ‘You end up applying a very low discount to the valuation of a business you think can succeed.’
The implication of these conservative valuations is that the upside - if it comes - can be be big and sudden. Asked if he held any ‘unicorns’ or unlisted companies worth a $1 billion, Woodford cited Purplebricks and two other of the trust’s top unquoted holdings, Benevolent AI, Immunocore. ‘These unicorns will become elephants soon,’ he predicted.
Investors will hope Woodford is right. If not, the danger is the number of investors abandoning Patient Capital could become a stampede, further depressing its shares.
The author holds shares in Woodford Patient Capital in his pension.