Woodford Patient Capital given 'sell' rating by broker

Investors urged to avoid paying over the odds after trust rockets to a 13pc premium

Neil Woodford, left, will invest much of his new fund in small, British businesses

Neil Woodford’s Patient Capital investment trust has been handed a “sell” recommendation just two months after making its stock market debut.

Iain Scouller, an investment trust analyst at Stifel, which acquired Oriel Securities last year, said “the shares had risen too far too soon”.

The launch was the biggest ever for an investment trust, attracting £800m from investors.

The trust, Mr Scouller pointed out, has rocketed on to a premium of 13pc. The shares, priced at £1 per share prior to the listing, trade at 116p today.

But the “net asset value” (NAV), which reflects the value of the underlying portfolio, has not kept up with the share price. It has risen by 4.3pc.

Mr Scouller said the “premium expansion” is the sole reason why he has issued a sell recommendation.

High demand from savers is not the only factor behind the trust being pushed on to a heavy premium.

Yesterday the trust formally entered the FTSE All Share and FTSE 250 index. Ahead of this tracker funds, which slavishly follow the up and down movement of an index, had to buy the trust which has helped spur a rise in the premium from 5pc to 13pc over the past month.

In a note to clients Mr Scouller said: “A patient strategy with an impatient price - take advantage of 13pc premium. Given the long-term 'patient' investment style, we think the shares have risen too far, too soon, partly for technical index joining reasons and we initiate with a sell recommendation.

“In the listed fund sector, we think excessive premiums can be as big a problem as excessive discounts and can lead to unwanted volatility in share prices.”

This is because of opportunistic trading when the disconnect between the price of the assets and the share prices becomes extreme.

Mark Dampier, head of research at Hargreaves Lansdown, the broker, said he would not buy the trust today, due to its sky-high premium.

But Mr Dampier said long term investors should avoid trying to "tactically trade".

"At a 13pc premium it has become too expensive to buy. But for investors who plan to buy and hold for the next ten years there is nothing to worry about," he said. "Those who sell now may be able to buy back in at a cheaper price, but I view this as gambling rather than investing."

The Woodford Patient Capital Trust invests heavily in early stage businesses and scientific intellectual property emerging from British universities. It is this strategy, Mr Woodford believes, that will propel the returns of 10pc per year the trust has set as a target.

Since the trust's launch Mr Woodford has made no announcement about where the money has been invested.

But some firms, including AJ Bell, the broker, have separately announced that Mr Woodford has invested part of the fund's available capital in their business.

Other holdings - announced before the trust's flotation - include medical firms SciFluor, Kymab, Verseon and Sphere Medical; and Gigaclear, an unquoted business that supplies high speed broadband to rural areas.

Many of the trust's target holdings are expected to be unquoted companies in the technology and biotech sectors, although large blue chip firms of the kind Mr Woodford has always invested in will also feature.