Woodford Investment Management said the step signals a shift in strategy to switch the struggling LF Woodford Equity Income fund’s unquoted exposure from individual unquoted holdings to shares in the Woodford Patient Capital investment trust (WPCT).

The deal involved five positions in unquoted companies being transferred for new WPCT shares to the value of £72.9m, plus an additional £6m paid in cash. This leaves the fund with a 9% stake in the investment trust, which targets early stage growth companies.

The first tranche of unquoted shares that has transferred from the income fund to the investment trust comprised of Atom Bank, Carrick Therapeutics, Cell Medica, RateSetter and Spin Memory.

WPCT already has positions in these companies, so it has provided the investment team with an opportunity to increase exposure to what they describe as “the second wave of global disruptors”.

The team plans to sell more unquoted shares over time.

Woodford Investment Management noted that unquoted holdings has represented around 8% of the equity income portfolio but has been responsible for generating around 40% of its 15% total return since launch in June 2014.

Disappointing performance

This decision to reduce unquoted exposure has been reached following a challenging few years for the £4.8bn LF Woodford Equity Income fund.

Over the past three years the fund has posted a loss of 5.5%, which compares to a 25.4% return by the average fund in the Investment Association’s UK All Companies sector, according to FE Analytics. The fund has a historic dividend yield of 4.1%.

The fund has more than halved in size over the past year and a half; it had £10.7bn in assets during the summer of 2017, underscoring the impact of outflows and poor performance.

Craig Newman, chief executive of Woodford Investment Management, explained: “Neil is as passionate on the unquoted asset class as ever but having listened to feedback from clients, we believe that moving the exposure to the asset class via a collective fund rather than individual unquoted stocks makes sense – both operationally and from an investor view.”

In response to the announcement, WPCT’s shares were trading down 0.24% at noon, at 83.4p per share.

Sensible move

Ryan Hughes, head of active portfolios at investment platform AJ Bell, described the decision to reduce unlisted exposure within the portfolio as a “sensible move” because it tackles one of the problems that the fund has faced over the past two years.

“It is always a challenge to own illiquid stocks in a daily traded fund and with the selling pressure that the equity income fund has seen with the fund halving from over £10bn to less than £5bn, it must have created difficulties for Woodford.

“The move to instead gain exposure through the Patient Capital Trust is an effective way to mitigate this with the illiquid nature of the assets well suited to a closed-ended investment trust structure,” Hughes explained.

Over the past 12 months, WPCT’s share price has risen by 10.9%, which compares to a 0.8% return by the average listed fund in the Association of Investment Companies’ UK All Companies sector.

WPCT currently trades at a 12.8% discount to its net asset value, which is higher than an average discount of 7.7% across the sector.