International Biotechnology Trust (IBT) aims to deliver a combination of strong capital growth and consistent dividend income from investing in biotechnology companies around the world. As we discuss in the Portfolio section, the managers believe IBT is exposed to a long-term secular growth theme, but in a sector that trades on less demanding P/E’s than wider equities.
Performance from the trust this year has been strong. Up until July, the sector and the trust performed strongly relative to wider equities, but since then global equities have outperformed. That said, since the summer, IBT has outperformed its benchmark, and calendar year to date, the NAV is ahead of the benchmark by 10.3% (to 02/12/2020).
The team of three, led by Carl Harald Janson, employs a distinctive approach that has enabled the trust to achieve this outperformance. They take a measured approach to investment, backed by identifying clear medical needs and understanding the science behind product research. However, an important differentiator is that the team prefers to reduce risk to specific stock moving events, such as clinical trial results, ahead of its announcement. This risk management tool has helped the team deliver a lower volatility return stream than the benchmark, whilst still enabling IBT to outperform.
Another key differentiator, and a strong contributor to returns this year, is the exposure to private companies. Investments here are led by Kate Bingham, offering exposure to early stage companies with explosive growth potential.
IBT pays a Dividend from capital of 4% of NAV each year (NAV value at end of the previous August). On 15 December 2020, IBT announced an interim dividend of 14.2p per share to be paid on 29 January 2021. Assuming the same amount is paid as a second interim dividend, the shares yield 3.5% at the current price.
The biotechnology sector offers attributes of strong, long-term prospective growth and an undemanding valuation. In our view, this makes it a differentiated growth story to technology stocks which have led the market.
Alongside the secular growth opportunity, IBT has some clearly differentiating characteristics – both in the underlying Portfolio, but also the investment philosophy behind it - which make it attractive from a diversification perspective. These same characteristics have led to its strong long-term performance. Over recent months, the manager’s active management, as well as exposure to unlisted companies, has meant that the NAV has significantly outperformed the benchmark.
With net assets of c. £330m, we think IBT is in a sweet spot. At this size, it is nimble enough to actively trade the underlying portfolio, but big enough to benefit from economies of scale and has enough market liquidity for most institutional investors to trade in the shares.
In the current environment, where visibility on dividends everywhere is murky, we see the consistency of the Dividend as a key attraction. The fact that the dividend is paid from capital means that it is not subject to the same pressures as dividends paid from current earnings. On a prospective dividend yield of 3.5%, this is attractive relative to that of other equity income sources. IBT remains a solid and differentiated way to get exposure to a sector which has secular growth and appears attractively valued relative to the wider equity market.
|Strong and specialised team, with a unique approach to biotechnology investment
||Biotechnology sector is inherently more volatile than wider equity indices
|Offers the combination of a solid yield and good prospects for capital growth
||Recent history illustrates short-term discount volatility can be high
|Risk-mitigating investment process has seen the trust deliver outperformance of the benchmark over five years, with lower volatility
||Unlisted holdings are highly illiquid, and given their maturity, higher risk