New Woodford Fund

bowlhead99

InvestInPoker wrote: »

It is a huge document but I skimmed it and I agree it looks great.

The performance fee seems to be an unusual part of it compared to the way things are usually done.

Having just a performance fee instead of (a) % management fee or (b) % management fee plus performance fee, is unusual.

But the methodology of how the performance fee gets charged (a percentage of amounts earned over a hurdle rate, subject to a high watermark) is a very standard way to charge a performance fee. Also there is further alignment of interest with the investors because a portion of the fee is paid in equity rather than cash (which will also help the fund's cashflow). Seems reasonable to me and the hurdle and fee rate aren't too outrageous.

Ryan_Futuristics

Very interesting fund ... Bear in mind a lot of these companies are unlisted, private equity, a lot are extremely small and difficult for us to value

So there is no benchmark, no index you can compare this kind of fund to ... It's going to come down to the team's ability to pick promising businesses and startups on their own merits, and then it could run on a different planet to the rest of the markets ... Not exactly new territory for the team - a lot of Woodford's long-term outperformance has been generated by unlisted companies he picks (i.e. you're quite outside the active/passive debate here)

It may also limit how large the fund can get - but in essence it's the kind of fund Buffett talked about when he said it wouldn't be unreasonable to expect 50% annual returns ... That's in the US of course - the perfect place for tech startups - perhaps these returns will resemble a typical UK private equity trust (i.e. a bit scary) ... Either way, I think the biggest beneficiary will be the UK economy, particularly the tech sector, in the long-run

bowlhead99

I don't really buy the idea that the economy will benefit greatly from the existence of the fund. It sounds nice in theory and looks good in the marketing but there are other groups providing capital to early stage and early growth companies. You mention private equity trusts, though they're only the tip of the iceberg compared to the unlisted private investment vehicles that are out there. A new player in town can push the prices up which is a good thing for the entrepreneurs if they have been under-served in the past, but it is not like British industry is going to be transformed by Woodford having a new fund with money to deploy.

You're right that investing in this early stage stuff puts a natural limit on how big the fund can grow and be effective ; the broad portion invested in early stage or early growth holdings will change over time but if their fund size doubles they need either twice the number of holdings or twice the deal size to keep the same % deployed into these areas.

It should be an interesting one to watch - I like stories about investing in small deals rather than big multinationals. Having half the money in much larger companies will help them with the liquidity problems you might get in a dedicated venture fund but that side of the portfolio is not something you couldn't find elsewhere - the fund will be relatively less interesting at the start than it is a couple of years down the line (if the target allocation is met in the timescales they expect). How the economy will be doing at that point and whether it's an environment in which the target businesses will thrive, remains to be seen.

Woodford has done deals in unquoted businesses before but only as part of much larger portfolios and so it isn't clear how well they've all done. High IRRs for some of them no doubt but investing a dedicated fund with a lot of capital across a lot of opportunities is a challenge for which he doesn't have a discrete published track record.

So, one to watch, and the fee structure and management seem investible - just a rather different beast from where he built his name, and a step up the risk scale. Compared to his more tradtional equity income funds it is probably not one for 'widows and orphans' but if those widows and orphans are planning to be living and needing investment returns a lot of years down the line (truly patient capital) then no reason it couldn't fit in a portfolio somewhere if they know what they're getting into.

Ryan_Futuristics

Well I'm thinking the fund's starting capital dwarfs what the gov put into smaller businesses through P2P lending recently - and with the 'Woodford effect', I'd wonder if this could be a fund that will rapidly find its saturation point (to the point the tech and pharma sectors Woodford likes will be as heavily invested as is practical)

Apparently unlisted companies have been a driving force behind the Woodford income fund's performance so far ... When you look at the top holdings, they're the same as every other Threadneedle, Artemis, etc. income fund out there - but performance has been quite different

It's a dilemma for me knowing how much to invest ... I put a lot of stock in Woodford's opinions, but I agree it is a new prospect, and will be an experiment for them ... My comfort zone is knowing valuations, and this is really putting faith in a manager (and in the UK economy - I've been much happier with equity income since QE) ... But I've been waiting for an opportunity to increase my UK smaller cos. and private equity - private equity being very popular with big investors because of how uncorrelated it tends to be to the stock markets ... I'm thinking around 3-5% of my portfolio - because despite the unknowns, I imagine it'll be trading on quite a premium quite quickly

bowlhead99

I think you're right about premium- the first Woodford fund sold very well, and reputation factors could create a potential premium from coming in at launch to cover the launch costs you bear and maybe a bit more if it's popular. This could mitigate the problem of having to be invested a while before the portfolio really begins to take shape. Obviously not to the extremes of a Royal Mail "get in at IPO or don't bother" situation, but we may see a small premium in anticipation of the returns against sector rivals (or lack of, direct sector rivals) with access to a niche you can't access yourself.

It is worth noting of course that "Smallcap" generally is not on a big premium at the moment and private equity is very often on a long term discount due to illiquidity and valuation difficulties. If they just sit on nil discount they will be 'overvalued' compared to a lot of other private equity trusts - but having a 50%+ listed component will help.

I'm relatively low on 'regular' UK smallcap having pruned quite aggressively when it was booming, so I could make space for this in my pension. Already have enough private-equity / alternatives in my sipp really but 2-3% could work. I wouldn't do 5% in a niche fund without a track record when I already have some exposure to the sector, and 1% doesn't move the scale enough, so for me it's 2-3% or nothing.

masonic

Ryan_Futuristics wrote: »

Well I'm thinking the fund's starting capital dwarfs what the gov put into smaller businesses through P2P lending recently

There's a fair bit more money sloshing around from various funding bodies than just that, but in my experience the money is tighter, being competed over quite fiercely and promising ventures are really struggling to secure funding, so I can see an unmet need.

bowlhead99

There's a difference between making cash available to startups and SMEs through debt finance (p2p or otherwise) and providing an equity funding round. Early stage and pre growth / early growth, debts are not so easy to service out of cashflow and an equity or perhaps mezzanine piece is more useful. So there is room for different players. Some equity-owning fund managers will be dedicated and hands on, some will be much more passive and take an equity slice and sit back and hope. The promotional material doesn't talk about Woodford providing support to the businesses other than funding them - he's not a venture capitalist.

But players of all types already exist, my point was just that making a further hundred million available over the next couple of years sourced from a new public closed-ended vehicle rather than other public and private vehicles will not shake up the market - according to the FT there was almost a billion quid of new VC money raised last year for London anyway, let alone the rest of the country. And the fact I can invest through Woodford will to some extent restrict me from investing via ABC or XYZ other smallcap/venture manager as I only have so much capital to go around.

Some of the "patient capital" will be genuinely new from people who don't have exposure to the sector, of course. Anything new is a good thing if you compare fundraising in UK vs Silicon Valley and the wider US - we do lag. But then you wouldn't expect to raise as much money as other parts of the world which have been doing VC longer and are much bigger markets anyway.

racing_blue

Just thinking aloud rather than asking serious questions, but:

Repeatedly taking 15% of the spoils, I can imagine a scenario where over N years, a portolfio manager could become the largest shareholder?

Is that OK, as long as the mathematics are such that investors also gain?

I seem to remember reading about something similar in Warren Buffet's biography

bowlhead99

If you imagine the fund starts with £1000. The fund returns 20% (£200) against the benchmark of 10% (£100). So the investors get their benchmark first £100 and then most of the rest while the management team keeps £15 of the second £100 - of which he takes away £3 in cash and has £12 of fund ownership.

So you have fund size growing by 19.7% compound and investor share growing by 18.5% compound and 0.3% out as cash. If you compound that for 10 years you have the investor slice growing from £1000 to about £5500 but the total fund size including the manager shares is £6000.

In this scenario the manager would be a 10% shareholder (keeping maths very rough).

But of course, (a) 20% for 10 years is unprecedented really - and any slip backs don't allow them to double-earn the performance fees the next year, because of the high watermark concept, (b) manager will presumably have ability to sell shares on the open market, (c) there's nothing fundamentally wrong with the manager having a decent wedge of ownership in a fund, other than the lack of ability to incentivise and motivate the staff in cash.

Reaper

Just a thought... while sold as a long term investment might there be a short term opportunity?

The investment trust is only issuing £200m of shares, which is not a lot. If you think this is likely to be over subscribed then there would be a short term jump in the price as those who missed out buy on the open market.

On the flip side:
1) It might not be over subscribed
2) They have said they may issue more shares if demand is high