We hear why fund manager Neil Woodford thinks Patient Capital Trust is on the cusp of delivering fantastic returns, and how he’s bought the household names of tomorrow.
Lee Wild, interactive investor:
Could you remind us where the concept behind Patient Capital came from?
Neil Woodford, fund manager, Woodford Investment Management:
The gestation of the Patient Capital idea is that, in summary, the UK has been, for many, many years, arguably for centuries, a leader with respect to innovation and scientific discovery. If you go back to the 18th century and before, UK scientists have led the world in terms of scientific discovery and innovation and the application of science.
Indeed, for large parts of that period of time, the UK was very good at adopting technology and deploying it to commercial benefit and that was essentially the foundation of the industrial revolution. We’re going back a long time now.
More recently, in the latter half of the 20th century and indeed in the 21st century, the UK has lost the art of exploiting that technological and scientific lead that we still have in our universities and research foundations. The UK has had a very, very poor track record of commercialising great scientific discoveries that occur here in the UK.
The reason that we’ve not been good at it is because I think there’s been a market failure. There’s been a capital market failure in that investors, owners of capital or deployers of capital, have not invested in that young technology to enable it to commercialise rapidly. Typically, the technology is being commercialised in other parts of the world, in Europe and particularly in North America.
That’s a pretty sad indictment, because we do lead the world in terms of scientific innovation and we have some of the best universities in the world. For example, Oxford University is the number one science university in the world. And Cambridge ranks equally highly as well, or close behind.
So we still lead in terms of scientific innovation, but, as I’ve said, we haven’t been able to exploit that scientific innovation and commercialise it to the benefit of the economy. And that is a challenge for the UK economy, but it is also an opportunity for investors, because there are great bits of technology coming out of our research institutions which are ripe for investment and where we believe we can deliver great returns.
So within my investment universe, which is broad … It stretches from very small businesses, unquoted, all the way up to the largest quoted businesses both here in the UK and internationally.
Across that investment universe, the most attractive and most exciting part of that investment universe is this disruptive technology sector.
I’ve been investing in this space for a long time and I’ve seen the fortunes of that sector sort of wax and wane over that 20 year period I’ve been investing.
But I have to say, the environment that exists now is the most exciting I’ve witnessed in a very long time. More capital is coming into this space. That means that some of these great technologies are able to fulfil their potential and that, I think, will deliver great returns to the investors who have parked capital in these young technology businesses.
So I am very excited about this area. It is the most under-valued part of my investment universe. It’s the area that I’m most excited about. It’s an area we’ve had to be very patient in, because that’s how you build capital in the long term, you have to be patient. We’ve been patient and I think we’re on the cusp of delivering some fantastic returns.
So that was the original hypothesis behind the creation of Patient Capital. That trust was created to invest in this space and it’s done so, I think, very successfully.
The share price and the NAV have not performed as well as we would have hoped, but we’re less than three years into the life of that trust and we said, “Judge us on our 3-5 year performance.” We have asked our investors to be patient, and I think we will reward that patience over that 3-5 year time horizon.
Lee Wild: You say you invest heavily in unquoted companies. How do you measure success? How important is it for those unquoted companies to seek a listing in time?
Neil Woodford: Ultimately, the acid test of success is whether we create value and deliver a good return to our investors. That’s the primary goal. I’m very confident we’ll be able to do that. On the way, I think the other characteristics of success are that we’re able to create multi-billion-dollar organisations that lead in new technology sectors, whether it’s AI or gene sequencing, in drug discovery or oncology. There are all sorts of areas … Or new energy.
There are all sorts of really interesting areas where we’ve invested where we think the companies that we have nurtured and are growing now very rapidly will become significant businesses in the future. Significant, I mean, in terms of market cap. Indeed, we think many of them will become household names, @GB:UKX:FTSE 100 constituents, for example.
So we measure success first and foremost by delivering on what we said in terms of returns to our investors. But the other characteristics of success are that we are able to demonstrate that we can, through the application of long term patient capital, scale great technology to become very successful enterprises.
Lee Wild: Obviously, returns to date probably haven’t been what you would have hoped for. But how patient do investors have to be? You’ve alluded to this earlier, I think, but how patient should investors be with the trust?
Neil Woodford: You cannot, and you should never, embark upon an investment in this space with short-term investment expectations. We always said that this was a long term patient capital vehicle and we said, “Judge us on our 3-5 year investment returns.”
In the near term, the NAV is a bit below our launch NAV. The share price is trading at a discount to NAV. I would much prefer, of course, if we were able to talk about a premium and an NAV that was above our launch NAV. But what I did say was judge us on our 3-5 year returns and we’re not yet at year three. So I think it’s far too early for investors to pass judgement.
What I can say though is that the portfolio we’ve built is a fantastic quality portfolio. It’s a portfolio of businesses that I’m very excited about that are delivering in the background and indeed arguably are way ahead of where we thought we would be in the real world.
So we’re making great progress with the businesses we’ve invested in. They’ve achieved, in large part, most of the milestones that we set for them. And it is only a matter of time before that progress in the underlying business is reflected in valuation uplifts.
This is the transcript of a video filmed in February. To watch the entire series of video interviews with Neil Woodford, please click here.
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