Thoughts on an investment trust launch
Thoughts on an investment trust launch is a guest post by Danielle Levy
History has shown investors that where there is a record investment trust launch, there is scope for disappointment.
The rise and fall of the Mercury and Kleinwort Benson European Privatisation trusts are prime examples. They raised record amounts in 1994 – £540 million and £480 million respectively – seeking to capitalise on the privatisation frenzy. A decade later both trusts were wound up after privatisation activity waned.
Fast forward 16 years. Star manager Anthony Bolton’s Fidelity China Special Situations trust launch made headlines in April 2010. It attracted close to £500 million, largely from retail investors who hoped the fund manager could repeat his stellar track record in the Chinese market.
Sadly, they were disappointed. A year and a half later Bolton apologised to investors after a period of poor performance caused the trust’s share price to fall 25%. As the years went by, it became clear that the Chinese market proved to be more of a challenge for the renowned investor than he or shareholders had anticipated. When he retired in April of last year, Fidelity China Special Situations’ share price was up just 0.5% after Bolton’s four-year stint at the helm.
From one star manager to another – Neil Woodford broke new records on 20 April after raising £800 million for the Patient Capital trust. It represents the biggest trust launch in UK history after Woodford Investment Management decided to raise capacity from the original £200-£500 million range to cater for strong investor demand.
The trust invests in early stage quoted and unquoted companies in the UK and US, accompanied by positions in blue chip companies for access to dividends. Woodford Investment Management will not apply an annual management charge and will only levy a performance fee – paid in shares – of 15% on returns above 10% each year.
Given the historical precedents, should alarm bells ring for potential investors in Woodford’s new trust?
Unlike Bolton who was entering a whole new market with the China Special Situations investment company, Woodford has long backed early stage companies – particularly in the university-inspired biotech and medical science sector. His new trust gives him the freedom to expand his remit and to back his long-standing interest.
Examples of Woodford’s success in backing unquoted stocks include Xeros, which provides energy efficient washing machine technology. It has experienced a 224.4% share price rise since it listed last April. Meanwhile, Allied Minds, which commercialises intellectual property, has posted a 234% share price increase since IPO last June.
More broadly, Woodford has a stellar investment track record. If you had invested £1,000 in one of his former funds, Invesco Perpetual High Income, at launch in 1988, you would have made £23,000 in October 2013 when he departed Invesco. A similar amount invested in the FTSE All Share would have been worth £10,254.66.
Since he set up his eponymous firm, the fund manager’s performance has proved just as robust. The Woodford Equity Income fund, launched last June, has returned 20% and is now £5.4 billion in size.
Does size matter?
The size of the trust should represent a concern for potential investors. At £800 million there are bound to be challenges for an investment company of that size to invest in small and potentially illiquid stocks. This is likely to mean a potentially more volatile experience for investors – particularly those who are used to his more mainstream UK Equity Income strategy.
Investors need to invest with a long timeframe and recognise that the trust is a different beast to the open-ended strategy, accepting the potential lows. Nevertheless, history would suggest that Woodford has a good chance of delivering strong returns in what is an exciting investment area.
After all, patience is a virtue.
Danielle Levy is news editor at Citywire
She is responsible for setting the news agenda for Citywire Wealth Manager – a weekly magazine and website – and is a regular contributor to the Money pages for the Independent on Sunday.
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