Star fund manager Neil Woodford has launched his latest fund for British investors, an investment trust named the Woodford Patient Capital Trust (WPCT).
Woodford intends to raise £200-500 million from the initial public offering of shares (IPO) in the trust to invest in early-stage science and technology companies. This is a bold departure from Woodford's days at fund house Invesco Perpetual, when he controlled over £20 billion of assets, almost entirely invested in blue-chip businesses.
With Woodford moving to invest in much smaller and riskier businesses, should we be quite so keen to jump on board? And how can we do so?
Getting in on the IPO
The public offering of shares in Woodford Patient Capital Trust opened last week and is expected to close by 5pm on Monday 13th April. Be warned, applications could well close early and without prior warning, so you should not hang about when applying.
As an investment trust, WPCT will be a London-listed company in its own right, and its shares will start trading at 8am on 21st April. Given the likely huge demand from investors keen to board Woodford's latest bandwagon, WPCT shares could enjoy a first-day 'pop' by leaping above their 100p fixed IPO price.
The minimum investment is £1,000 and there is no maximum. However, if total applications do exceed the £200-500 million fund-raising range, then investors' holdings could be scaled back to cope with excess demand.
As with other listed shares, WPCT shares can be held inside a tax-free ISA. So investors could buy up to £15,240 of the trust's share inside this tax shelter for the 2015/16 tax year.
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What will Woodford buy?
According to WPCT's prospectus, Woodford will invest the funds raised as follows:
- In early-stage science and technology-focused businesses, helping to plug the funding gap in the commercialisation of Britain's 'knowledge economy'.
- As this portfolio develops over the next couple of years, it will move from investing in mature, medium-to-large businesses into small, developing companies (both quoted and unquoted) as opportunities arise.
- In time, the trust's assets will comprise roughly 25% in mature companies, 25% in revenue-generating but still cash-flow-negative businesses, 25% early-stage companies (riskier and typically not even generating sales) and 25% other opportunities.
- Up to three-fifths (60%) of the trust's assets could be in unquoted (unlisted) companies. By definition, these investments will be highly illiquid - difficult to buy and sell quickly - and may be valued only once every six months.
- When mature, the trust's portfolio will contain up to 100 holdings and at least 40. No more than 15% of trust assets will be in any one holding, and overseas holdings will be limited to an upper limit of 30% of assets.
- The trust's target is to generate a 10% yearly return for investors.
Woodford's charges and fees
This trust has an unusual fee structure - and one which rewards Woodford and his team for their success.
[SPOTLIGHT]There is no ongoing management charge. Instead, Woodford Investment Management is paid a performance fee when the trust's yearly return exceeds a 10% hurdle rate. Woodford takes 15% of all excess returns above this level (mostly in WPCT shares), aligning his interests with those of other shareholders.
After each yearly performance payout, this hurdle is recalculated, producing a higher target share price for the next year. The next performance fee is based on this new 'floor' price.
The trust will charge an admin fee to cover its day-to-day costs. However, based on raising £200 million, this fee is expected to be no more than 0.35% of assets per year (£700,000 in total).
Note that the £3 million IPO costs will be taken from the initial fund-raising. If these come to £200 million, then the £1 fixed IPO price will buy only 98.5p of assets. Therefore, the trust will immediately start trading at a small premium to its NAV (net asset value) of, say, £197 million.
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Now for the many risk warnings
This is a far cry from Woodford's days as Invesco Perpetual's celebrity fund manager, when he might allocate a billion pounds to a single shareholding in a favoured large company.
Indeed, example companies included in WPCT's prospectus are an unquoted firm providing broadband to rural areas, a company developing an innovative '(almost) waterless washing machine', and a business spun out of Oxford University focused on molecular diagnostics, such as DNA sequencing.
So the first - and perhaps most important - thing to note about Woodford's trust is the word 'patient' in its title. This is not a fund for traders and quick-fix investors. Given its emphasis on early-stage and long-term investing, the trust is likely best suited to investors happy to take a 10-year view. Likewise, WPCT is aimed firmly at experienced and veteran investors and is certainly not the first fund newbie and inexperienced investors should buy.
Similarly, while investing in early-stage technology companies can be enormously lucrative, WPCT investors should brace themselves for a few write-downs and total write-offs as this trust matures. These are highly risky, niche markets where perhaps nine in 10 start-ups fail in their first couple of years.
By launching this fund as in investment trust, Woodford avoids the illiquidity that might be a problem for a unit trust or OEIC struggling to cope with mass redemptions. In fact, the price of the trust's shares will be governed by the usual market demand between buyers and sellers. Over time, this means that the trust's share price could diverge significantly from its underlying NAV per share. Although investment trusts can borrow money to gear (juice up or magnify) their returns, Woodford has no plans to use gearing.
Where can you join in this IPO?
You cannot invest in this IPO via Woodford Investment Management. Instead, you must go through a stockbroker or investment platform. Two super-heavyweights of UK retail investing, Fidelity and Hargreaves Lansdown, are battling to win the lion's share of Woodford Patient Capital Trust's IPO.
Fidelity claims to be 'one of the cheapest places to hold this investment trust within an ISA or general investment account, as it will not have any service charges.' On the other hand, FTSE 100 firm Hargreaves Lansdown has won a guaranteed (but undisclosed) allocation for its clients, making it the only execution-only broker with this guarantee. Other firms through which you can apply for WPCT IPO shares include Alliance Trust, Barclays Stockbrokers, Interactive Investor and TD Direct Investing.
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