International Biotechnology 18 March 2024

Ailsa Craig and Marek Poszepczynski are celebrating three years as co-managers of International Biotechnology Trust (IBT), during which period the managers have outperformed the benchmark and both of their biotech investment trust peers. Much of the period has been a difficult one for the sector, but the risk management of the experienced pair has contributed to the good relative performance, along with strong returns as the market rallied late last year (see Performance).

Biotechnology is a rate-sensitive industry, and this, along with risk aversion in markets, meant that the sector languished in 2021 and 2022, and for much of 2023 too. However, the US rate cycle now decisively appears to have peaked, with rate cuts a matter of when, not if. A recognition of this seems to be behind the strong performance seen in Q4, and Ailsa and Marek argue that when rates moderate or are cut, biotechnology looks poised for a strong period of performance – as it has enjoyed in past rate-cutting cycles.

A surge in M&A late last year has increased their confidence that the cycle is turning in their favour, along with a sharp increase in equity financing into the sector in early 2024 and early signs of a burgeoning IPO market. Valuations, M&A and the macroeconomic outlook contributed to the managers making a well-timed move into small caps in Q4, and while they have taken some profits and allowed Gearing to fall, they maintain a positive outlook for the sector.

IBT remains on a 9% discount at the time of writing. The trust pays a Dividend from capital, equal to 4% of the previous year-end NAV.

Biotechnology is a sector that has delivered outstanding returns in the past, with obvious secular tailwinds behind it: an aging population means more need for drugs to tackle disease, while rising scientific developments are spurring research and improvements in treatments. Until the last six months, recent years were disappointing as the sector went through a down-cycle, but in our view the outlook is much more promising. The rates environment is critical, as falling rates will lead to greater interest in growth areas. However, we think even just the abatement of fears of rate hikes and a severe recession should themselves be positive, as this would reduce risk aversion.

Ailsa and Marek had significant experience, including a combined 20 years on the management of IBT, before taking over as co-lead managers of IBT in 2021, and have delivered good performance since then. We think they have the expertise to continue to deliver in a specialised sector, with their new home at Schroders able to provide substantial resources. A key attraction of the managers’ approach is the efforts they put into risk mitigation and management. This includes how they diversify the portfolio by treatment area and by company and how they reduce stock-specific risk ahead of binary events. It is also seen in the tactical approach to gearing and portfolio construction that has seen them moderate the extra risk they took on late last year in early 2024. In our view this adds to the attractions of the trust as a long-term holding for investors who want access to this exciting but risky industry.