A true all-rounder

When he wasn’t defending the free world from the Nazis at the controls of a Mosquito night-fighter, Australian cricket legend Keith Miller found the time to complete 14,182 runs in first class cricket at an average of 48.9.

Miller, who died in 2004, is widely regarded as international cricket’s first genuine ‘all-rounder’; whose skill with ball and bat made him a force to be reckoned with in both positions. As any follower of the sport will know, players with enough talent to excel at both batting and bowling are rare indeed and, as with sport, so in life, true all-rounders are few and far between.

From an investors’ point of view a true all-rounder must deliver on a number of criteria. For most, it is fair to assume that it would have a strong track record of annualised growth, and perhaps for just as many, a solid yield which could keep pace with inflation. Low correlation with other funds in a portfolio might also be an important for those who have existing investments and, increasingly, a positive impact on society or the environment is considered a must-have.

In years past, UK equity income funds offered one option for those investors concerned with the first and most fundamental two of these criteria; combining the potential for capital growth (albeit sometimes quite modest) with a consistent and sustainable dividend.

The years since Brexit, troubled as they have been by far greater events than the bickering over quotas and tariffs which was to be expected, have put paid to UK equity income as a straightforward option. Dividends from UK companies, already stumbling under the weight of the fallout from the Brexit referendum, crashed in 2020 when the Coronavirus first took its place on the world’s centre stage, falling 44% according to data from Link’s Dividend Monitor.

Income focused investors have taken the hint, and data from the Investment Association’s most recent Investment Management Survey shows that in each of the last four years equity income funds have seen significant outflows. The sector saw £2.5bn walk out of the door in the second half of 2020 alone.

The Investment Association says that much of this money has found its way into fixed interest funds, which saw total inflows of £8bn in 2020 even after huge outflows at the start of the year, but with three interest rate hikes already in the last four months, and more likely in the pipe, this type of fund offers little comfort for investors who want the capital they invest to keep pace with inflation.

International Biotechnology Trust (IBT) may offer an interesting solution. The trust, managed by Ailsa Craig and Marek Poszepczynski, aims to deliver long term capital growth by investing in a global (though US dominated) portfolio of biotechnology and life-science companies.

IBT has delivered annualised total returns of 14.69% over the last ten years and – fulfilling the first and second of our ‘all-rounder’ criteria – is able to offer an income as well, paying a yield equivalent to 4% of NAV each year. It can do this because of a structural feature unique to investment trusts; the ability to convert some of the capital growth which is generated by the underlying portfolio into an income payable to shareholders.

While this does take away some of the potential for capital growth (because part of the capital deployed is being taken away to support that income each year), the trust’s strong long term growth profile means it should be able to afford to do this and still aim to generate worthwhile capital growth as well. With M&A being a structural part of the biotech ecosystem, the trust can supplement its dividend payments with cash inflows received when its portfolio companies become the subject of an M&A transaction.

Biotechnology is a high risk, high return area of the market – so investors should be aware of the volatility they may face; but one of the noticeable features of IBT’s track record over the last five years is that it has achieved strong returns with considerably less volatility than its benchmark. This is a result of a conscious effort by the team to deliver returns with lower volatility than the index, a result of its approach to diversifying risks, but also systematically to reduce active exposure to stocks ahead of scheduled trial results or approval decisions by the regulator.

Capital growth over the long term means a rising net asset value (NAV). The trust’s yield commitment is to pay 4% of its NAV, and in that context, should mean that the income it pays increases over time too, which could appeal to those worried about the effect of inflation.

IBT also scores highly on another of our criteria; acting as a diversifier via exposure to a portfolio of highly specialist companies, and with another key differentiator; exposure to unquoted investments, which currently represent 9% of NAV (as at 28/02/2022) under the stewardship of Kate Bingham, now a household name thanks to her leadership of the UK’s COVID task force in the dark days of the pandemic.

Kate’s involvement in the trust is a fitting point at which to remind ourselves of the final criteria we might look for in an investment ‘all-rounder’; a real positive impact from an ESG point of view.

On this measure, the impact that both the quoted and unquoted sides of IBT have as a force for good is obvious. Its very purpose is to generate returns by backing the development of drugs and therapies that will over time save lives, prevent diseases, and improve conditions for perhaps millions suffering from severe illness.

Ailsa Craig put it well when we spoke to her and Marek about their motivations as managers of the trust last year.

“We have seen drugs that we backed in their infancy go on and make a real difference to patient outcomes. Identifying the drugs in development that will become the game-changing treatments of the diseases of our age is what investing at the cutting edge of science is all about”.

A true all-rounder, indeed.

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