International Biotechnology 30 March 2022
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.
International Biotechnology (IBT) represents a specialist exposure to an area of the market that offers the prospect of strong capital growth, backed by numerous secular long-term trends.
The managers are true stock pickers, able to actively allocate capital within the universe, which they see as a huge advantage, particularly in the current market. The team observe that the larger cap companies which dominate the NASDAQ Biotechnology Index are likely to have stalling revenue growth over the next few years, implying that passive investors may be disappointed in terms of returns. IBT’s managers have increasingly been focussing on mid and small cap companies to benefit from what they see as the strong likelihood of a wave of M&A driving returns in this part of the sector.
In contrast to wider equity markets led by mega-cap technology stocks, the biotechnology sector has retrenched since early 2021. However, having fallen further in early 2022, the team have reacted by adding to gearing. As the managers commented in a recent blog, “We firmly believe the fundamentals of the sector remain very much intact… we at IBT are buckled in and ready for the ride”.
IBT pays a dividend from capital each year. At the current annual rate of 31.4p, the shares offer a prospective dividend yield of 4.9%. As such, IBT provides a very differentiated exposure for income investors. Over the past five years, IBT’s average discount to NAV has been 2.2%. The board has been buying shares back during March 2022, we estimate at a c. 6% discount to NAV. At the time of writing the shares trade on a discount of 5.8%.
As we highlight in the Performance section, one of the noticeable features of IBT’s over the last five years is that it has achieved strong returns with considerably less volatility than its benchmark, the NBI. This is a result of a conscious effort by the team to deliver returns with lower volatility than the index, a result of their approach to diversifying risks, but also systematically to reduce active exposure to stocks ahead of scheduled trial results.
This has resulted in IBT’s NAV being less volatile and having a lower maximum drawdown than peers and the benchmark over the past five years, and IBT has also outperformed its peers over this period on a NAV basis. We see this as vindication for the team’s approach, proving that taking a higher risk approach doesn’t always result in the highest returns. A key aspect of IBT’s portfolio is its exposure to unquoted investments, which currently represent 9% of NAV (as at 28/02/2022). Unquoted investments will remain within a 5% to 15% guideline range set by the Board of Directors.
That gearing has increased markedly this year is in our view indicative of the high conviction that the managers currently have in the long-term investment opportunity presented by their portfolio. If they are right, the small and mid-cap exposure and level of gearing could set the trust up for a strong period of performance.
- Strong and specialised team, with a unique approach to biotechnology investment
- Offers the combination of a solid dividend yield and good prospects for capital growth
- Risk-mitigating investment process has historically seen the trust deliver good performance, with lower volatility than the benchmark
- Biotechnology sector is inherently more volatile than wider equity indices
- Recent history illustrates short-term discount volatility can be high
- Unlisted holdings are highly illiquid and, given their maturity, higher risk