A small article in this Sunday Times’ Money section summed up a lot of what I think is wrong with the asset management industry. Having begun by stating that “it is early days yet for an investment trust marketed on the basis that it should be bought only on a 10-year view”, the column goes on immediately afterwards to cite the fact that it has risen by 13.8% since its launch in April as evidence that Neil Woodford is continuing to deliver the goods and prove “many City smark alecks” wrong.
I actually think that Neil Woodford will more likely than not continue to do an excellent job for his investors over the long run, because his track record (prior to this new Trust) is long enough to have proved beyond doubt that his past results have been due to more than good fortune–the man knows his business. However, to rush out a verdict after little more than two months of a brand new fund that explicitly requests a much longer than usual time horizon is asinine in the extreme.
Not only that, but if you dig a little deeper and look at the supposed 13.8% rise more closely, you can see that no less than 11% of this is entirely due to the premium. (The most recently published NAV for the trust is 102.49.) So investors excited by articles such as this who now rush to get a piece of the action will be paying more than 11% over than the fair value of the trust’s assets for the privilege. You may as well use a £1000 to buy an asset worth £890 and then drop your £110 change directly into the river Thames. Hardly a path to prosperity. Why not just wait until the premium is eroded and then buy into the trust at a fair price that would give you a sporting chance of getting a fair return? Of course the trust might motor along merrily for the next decade with its +11% premium intact, but buying in at this level does tilt the odds against you.
This cycle (new trust -> media hype -> fat premium -> market downturn + premium erosion -> disillusioned investors -> untimely sale crystallising nav + premium loss) is unfortunately an old story. Fidelity China Special Situations, Anthony Bolton’s old trust, launched with equivalent media fanfare in 2010 and also raced to a greater than 11% premium shortly after its launch in 2010. Five years on, despite an estimated 86% rise in the NAV since then, the trust now sells at a 13.5% discount.
Another example is Terry Smith’s Fundsmith Emerging Equities Trust, which also benefitted from significant media coverage at its launch. Again the premium rocketed to touch 12.5% at one point, before dropping back to its current <3% mark. Any investors unfortunate enough to have bought in at the wrong time have lost 10% of their investment before any reference to performance of the fund’s underlying assets.
So, if I had owned the Patient Capital Trust since its listing (which I haven’t) and was fortunate enough to be sitting on a big notional gain that was almost entirely due to the premium, would I sell? No, but neither would I sit back with my cigar out congratulating myself on my shrewdness. This gain is entirely ephemeral and so I would focus on the NAV instead, while trying to remain cognisant of the fact that the trust’s investment horizon should be even longer than usual. The clue is in the name: Patient Capital.
Disclosure: No direct position in WPCT (although it is held by BACIT Ltd).
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.