InvestmentsJun 28 2019

Woodford will need permission to make investments for trust

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Woodford will need permission to make investments for trust

Neil Woodford will have to get the approval of the board of directors of the Woodford Patient Capital trust before he can make any new investments.

Woodford Patient Capital is the £522m investment trust managed by Mr Woodford with the aim of investing in smaller quoted and unquoted companies. 

Investment trusts have independent boards of directors to whom the fund manager is accountable but Woodford Patient Capital trust has lost 31 per cent over the past three years.

The trust has many holdings in common with the Woodford Equity Income fund, run by the same fund manager, which has been suspended since June 3 as Mr Woodford battles to generate sufficient cash from investment sales to pay clients who wish to exit the fund.

The trust's board has now told Mr Woodford he must now inform them in advance if he wants to make a new investment, add more capital to an existing investment, or sell any holdings that are also held in his Equity Income fund. 

A statement from the board, released this morning said: “The board's primary focus is to preserve the value of the assets in the portfolio and to protect the interests of shareholders in the company. Therefore, since [...] the gating of [Woodford Equity Income], the board has introduced additional controls within [Patient Capital].” 

When he suspended the Equity Income fund on 3 June, Mr Woodford said it was to avoid being a “forced seller” of any of the investments, meaning he would have to take a lower price than the trust value of an asset in order to raise cash.

Fears of this nature are one of the reasons the Patient Capital trust now trades at a 30 per cent discount to net asset value.

Investors fear that the net asset value will have to be reduced because many holdings in the Patient Capital trust are also held in the Woodford Equity Income fund, with the latter fund selling big stakes in order to raise cash. 

Under investment trust rules, if the board take the view that an asset sold by the Equity Income fund but also held in the trust has been sold by a “distressed seller”, then the investment trust does not have to revise down the valuation at which it owns the assets, according to three industry experts consulted by FTAdviser

In addition to the increased monitoring of the investments being made by Mr Woodford, the board of the trust have also decided to reduce the gearing on the trust.

Gearing is money borrowed by an investment trust to make new investments. If the investments made using the borrowed money are successful, then this enhances the returns for investors, but if the investments perform poorly, then it makes the returns for investors even worse than if the money had not been borrowed.

At present, the trust has 16.8 per cent gearing, and can borrow up to 20 per cent. The board have decided to change this, capping the gearing level at 10 percent, though the reduction will happen gradually.

The board announced this morning that if the discount persists even after the gearing has fallen, a share buyback could be carried out. 

A share buyback reduces the number of shares in a trust, so should increase the value of each share. 

Commenting on the various changes, a representative of Woodford Investment Management said: “We remain in close contact with the board and are aligned in delivering shareholder value in accordance with the investment objective of the trust.”

david.thorpe@ft.com