Does owning this stock make Neil Woodford silly or a star?

Neil Woodford is considered to be one of the UK's best fund managers. His strategy of using slow and steady income stocks complemented with high-growth speculative small caps helped him to produce a return of 13% per annum for investors during the 26 years he was running the Invesco Perpetual High Income fund.

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Woodford continues to use the same strategy today at the Woodford Equity Income fund.

One of the highly speculative investments that currently sits in the fund's top 10 holdings, accounting for 2.3% of assets, is Allied Minds(LSE: ALM). But will Woodford live to regret this holding?

Lossmaking

Allied Minds splits opinions among investors. The company is an investment business and for the last three years has reported pre-tax losses every year. City analysts expect this trend to continue for the foreseeable future.

Nonetheless, since coming to the market in mid-2014, Allied Minds has generated impressive returns for investors. The shares have gained 102%, beating the FTSE 100 by around 95%. It's likely Neil Woodford is betting that this trend will continue, but what does he see in the lossmaking business?

A risky bet

Allied Minds is in many ways a lottery ticket. The business invests in early-stage life sciences and technology companies and currently has 25 subsidiary businesses at varying stages of maturity. These businesses are founded on technological innovations in medical devices, biopharmaceuticals, cyber security, wireless communications, semiconductors, low Earth orbit space, and food safety markets. An example is Precision Biopsy Inc, a firm that is trying to streamline the process of prostate biopsies -- a process that has remained unchanged in nearly 30 years.

If Allied's initial investments do start to pay off for the firm, investors could be richly rewarded. And it looks as if this is what Neil Woodford is betting on. He's investing in the experience of Allied's management and the group's business connections to help incubate and accelerate the growth of these transformational start-ups.

In many ways then, Allied is a venture capital business that could become a multi-bagger over the long term. At the end of June 2016, the firm had $98m in cash, so it has plenty of firepower to continue its strategy for the time being. The firm is also investing alongside Neil Woodford in some opportunities. For example, a subsidiary business called HawkEye 360 recently raised $2.8m, some of which was funded by Woodford Investment Management and Invesco Perpetual.

Blue sky opportunity

Overall, it looks as if Neil Woodford owns Allied Minds for its blue sky potential and that's certainly not a 'silly' strategy. If the company's investment portfolio yields results, Allied's investors could see a huge return on their investment. The fact that the group has spread its bets across a number of opportunities increases the likelihood of success. There's no need for all of these businesses to succeed for Allied to reap the benefits.

However, this business may not be suitable for all investors as it's certainly riskier than your average blue chip stock.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.