Shares in Woodford Patient Capital Trust (LSE: WPCT) had been picking up from their recent low, gaining 10% since 28 August.
That’s against a significant discount to net asset value (NAV) – the shares had plunged to a discount of 48% when I investigated in August. Now, investment trusts do typically trade at a discount, with a share priced at a little less than the underlying assets that the share represents. But I’d generally view a discount of around 15% or so as looking attractive, depending on the circumstances. I don’t recall ever seeing anything this big before.
Unquoted
One problem with Woodford Patient Capital is that it invests heavily in unquoted assets that are notoriously hard to value, which adds significant uncertainty to any published NAV figures. By contrast, many trusts invest exclusively in quoted equities on world stock markets, which makes the NAV much easier to calculate. In my view, trusts like that are often a great choice if you’re looking for a long-term pooled investment.
The Woodford trust has now suffered a new blow resulting in a lowering of its NAV, due to a write-down in the value of an investment picked by fund manager Neil Woodford. One of the the trust’s investments has had its valuation lowered by £42m by auditors Link Fund Solutions.
Unfortunately, investors are not yet allowed to know the name of the downgraded company for confidentiality reasons, and that’s another reason I don’t like investments in unquoted assets – with listed companies, far more is out in the open where we can all see it.
Again
This latest hit to the Woodford trust comes less than a month after another of the firms it holds was devalued. That time it was Industrial Heat, and the downgrade hit Woodford Patient Capital to the tune of around £30m.
Subsequent to the two valuation downgrades, the trust’s NAV was restated Monday morning at 69.04p per share. Compared to 78.96p the day before the Industrial Heat news emerged, it’s down 12.6% in a little over a month.
At that level, and with the shares currently trading at 45.4p, we’re looking at a discount right now of 42.5%, which is still pretty enormous in terms of what’s usually seen with investment trusts. So is Woodford Patient Capital oversold and is it a buy?
Caution
My Motley Fool colleague G A Chester (who has been negative on Woodford Patient Capital for some time and deserves a nod for that) thinks there are still good reasons to steer clear. As he points out, Woodford is under considerable pressure to sell off a lot of unquoted investments. For one thing, he needs to clear the trust’s £150m overdraft within 12 months. Seeing an investment trust geared with borrowed money is not something I like either.
That, plus the effects of Woodford selling often the same assets within his currently gated Equity Income fund, seems very likely to lead to more valuation reductions, especially as so many of them are currently unprofitable.
I had been tempted to buy a few Woodford Patient Capital shares in the hope of a rebound, but I see enough long-term negativity that I’ve decided against it.
