Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by International Biotechnology. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
The biotechnology and healthcare sector has attracted considerable attention over the past year as the COVID-19 pandemic has grabbed the headlines. Within the investment trust space, we have seen investor interest in the Association of Investment Companies’ (“AIC”) Biotechnology and Healthcare sector increase, reflected in premiums expanding almost across the board. At the time of writing, only one trust in the sector trades at a discount.
At a time when investors are clamouring for exposure to a sector which is in the spotlight, it might be easy to be carried away in the rush to get on board. However, within the Biotechnology and Healthcare sector, trusts do exhibit a wide range of risk/reward profiles. In this article, we look at a trust which has followed the same clear, risk-averse, proven investment strategy which has delivered annualised NAV total returns of more than 16%1 per annum since the appointment of the Lead Fund Manager, Carl Harald Janson in September 2013.
International Biotechnology Trust: a clear focus on returns
International Biotechnology Trust (IBT) aims to deliver a combination of positive capital growth and consistent income, the latter harnessed by converting some of the positive capital growth which is available from investing in biotechnology companies around the world, predominantly in the US. Net assets currently sit at c. £330m, meaning that the trust is small enough to actively trade the underlying portfolio, but big enough to benefit from economies of scale.
Dr Carl Harald Janson of SV Health Managers LLP, a former doctor, heads the three-strong team, taking a measured attitude towards risk and investment. The team identifies companies with strong management, solid financials, attractive valuation, addressing clear medical needs whilst using their knowledge of the science to gain an understanding of the product research. A key differentiator of the trust is that the team routinely chooses to reduce risk to specific stock moving events, such as clinical trial results, ahead of any announcement. In this way, the trust aims to deliver its returns with considerably less volatility than its peers.
Another key differentiator, and an important aspect of the trust’s outperformance against its benchmark, the NASDAQ Biotechnology Index, and the lower volatility delivered in 2020, is the trust’s exposure to private companies. Investments in the unquoted portfolio are predominantly through a venture capital fund – SV Fund VI - led by Kate Bingham, Houman Ashrafian, Mike Ross and other partners at SV. SV Fund VI offers growth potential from investments that are typically otherwise inaccessible to the everyday investor. As at the end of January 2021, 12% of the portfolio is unquoted - 8% in the venture fund and 4% invested directly in private companies.
Alongside NAV growth, IBT can be seen as a source of income. The trust’s policy is to pay 4% of NAV from capital reserves each year as a dividend. In the current environment, where dividend income is uncertain for a large number of investors, we see the consistency of the dividend as a particularly noteworthy aspect of the trust. The dividend is paid by taking some of the capital growth generated by the companies in which the trust invests and paying that out as an income each year, rather than relying on dividends paid by underlying companies. While paying a dividend from capital has an impact on the trust’s NAV, it means that the trust’s dividend is not exposed to the pressures on yield caused by COVID-19 which have seen dividends slashed in many places, wounding traditional dividend reliant income funds.
Looking forward it seems clear to us that with a focus on better healthcare provision now firmly in place all over the world, investor appetite for the biotechnology and healthcare sector will continue. Despite this tailwind, the managers note that on a valuation basis, price/earnings multiples for the large profitable companies in the sector are lower than those in other high growth sectors, such as technology and real estate. The managers are currently wary of some of the higher valuations of certain early-stage companies, especially those which do not yet have any clinical data, and take a selective, valuation aware, approach to this segment of the market. At the other end of the spectrum, where a slower pace of innovation has kept valuations down among the large to mega-cap sector players, the managers see some value and anticipate possible corporate activity. The innovative mid to large caps remain a core area of interest with plenty of companies with products approved, monopoly positions, predictable earnings, and attractive valuations.
While the trust is currently trading on a premium of c. 0.7%, we note that the average premium for the AIC Biotechnology and Healthcare sector is c. 7.5% and, while it has traded at a discount in recent years, we think the increased visibility of the biotechnology sector which COVID has likely created, coupled with the high rate of innovation generating new therapies, and relatively attractive valuations of the sector versus other industrial sectors in the US, we think puts significant momentum behind IBT’s ability to continue delivering positive performance over the long term.
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