Investors in Neil Woodford’s £4.6bn Equity Income fund should be unhappy with the recent deal announced by the fund manager’s firm, according to analysts at JP Morgan Cazenove.
Neil Woodford transferred £72.9m of unquoted shares from his Equity Income fund to the Patient Capital investment trust.
The transfer of the five unquoted holdings from Woodford Equity Income to the trust was in exchange for £72.9m worth of shares in Patient Capital.
In addition the Equity Income fund also paid £6m of cash for shares in Patient Capital.
At the end of the transaction, the Woodford Equity Income fund will have a 9 per cent stake in Patient Capital.
But Christopher Brown, an analyst at JP Morgan Cazenove noted that while the shares of the Patient Capital investment trust trade at a 13 per cent discount to net asset value, the Woodford Equity Income fund is paying the full price.
Trading at a discount to NAV means the shares are trading at below the value of the assets, so the shares can be bought for less than the cost of the assets.
This means shareholders in the Equity Income fund have paid 13 per cent more than the current value of the assets than they had to.
Mr Brown wrote: "This shines a light on the differing governance standards that exist for closed and open ended funds, in our view.
"Closed-end funds have an independent board of directors whose job it is to safeguard the interests of shareholders. Open-ended funds have no such protection and we would be surprised if the open-ended fund investors would be happy with the dilution they will face on their [Patient Capital] investment."
A representative of Woodford Investment Management said Mr Woodford believed the share price discount was an "anomaly" and he believed in the long-term value of the shares, so the higher price was not a problem.
The representative added: "Woodford explored how much it would cost [Equity Income] to purchase c£80m shares in the secondary market and their analysis suggests it would cost more and take significantly longer to purchase this number of shares than buying at NAV via tap issuance."
The fund's decision to pay what the assets are actually worth has been done with the belief that the assets will significantly appreciate over the medium-long term.
Woodford Investment Management also emphasised that liquidity issues were not a factor in the transaction.
The Woodford Equity Income fund has shrunk in size from more than £10bn to less than £5bn, requiring the sale of assets to meet redemptions from investors seeking to sell the fund.
Removing the illiquid assets from the fund makes it easier to sell assets to meet redemptions.
Ryan Hughes, head of active portfolios at AJ Bell, said: "The move from Woodford to begin the process of reducing direct exposure to unlisted stocks is a sensible move and tackles one of the problems that the Equity Income fund has had over the past two years.