International Biotechnology 12 October 2022
Disclaimer
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by International Biotechnology (IBT). 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 Trust (LON:IBT) aims to grow capital over the long term by investing in innovative biotech companies that seek to address unmet medical needs. The lead investment managers, Ailsa Craig and Marek Poszepczynski, have deep insight and expertise in healthcare and biotech investing, both from a financial and scientific perspective. The team are bottom-up stock-pickers but are conscious of the macro environment and will aim to diversify the portfolio across market caps, development stages, therapeutic areas and geography. Also, as part of their risk management process that is examined in the Portfolio section, they will systematically reduce relative exposure to companies that reach a junction with a binary outcome, for example, just before trial results or news of regulatory approval decisions.
There are strong secular drivers of growth for the sector, reflecting ageing populations in developed countries and a growing middle class in developing countries. These are driving demand while the advancement of technology, a growing scientific knowledge base and the regulatory environment are helping to bring more drugs to the market. The team observe that the biotech sector is not cyclical, in the typical sense, but that it has its own investment cycle and they believe that the sector is looking attractively-valued after the significant sector drawdown.
IBT pays an annual dividend that is equivalent to 4% of the previous financial year end’s NAV and this makes it amongst the top income-payers in its peer group. As discussed in the Dividend section, this means, however, that dividend pay-outs can fall, as will likely be the case for the financial year ending August 2023. Currently, IBT trades at a discount of 5.9% and has an OCF of 1.4%, excluding any performance fee.
While IBT has performed in line with its benchmark over a five-year period, it has held up better and with lower volatility than the benchmark over the past 12 months. During this time, biotech stocks have retrenched from their previously stretched valuations. The team believe that lower valuations are set to kick-start the next wave of M&A activity, especially involving larger pharmaceutical groups which kept away during the covid pandemic period and need to replenish their drugs’ pipeline as several of their blockbuster drugs have looming patent cliffs.
The team takes a view on the macroeconomic outlook and the sector’s likely reaction to it and positions the portfolio accordingly, using large caps as a relatively safe haven and tilting into smaller caps when a rally is expected. In anticipation of the pickup in the sector’s investment cycle, the team raised the gearing significantly earlier this year (see Gearing section), but this has now been moderated to 10%, still well above the long-term average of 4%. The current bout of risk-off sentiment, prompted by the worsening global macro-economic environment, means that increased gearing has not yet paid off. Nonetheless, biotech investing is for the long term and we believe that lower valuations present a good opportunity to be putting capital to work, especially in an innovative sector with strong secular growth drivers. The team’s risk mitigation strategies have given IBT a lower volatility profile than its benchmark and peers. Added to this is the attractive dividend yield and IBT’s target exposure of 5%-15% in higher-growth unquoted investments, providing access that may otherwise be difficult for retail investors.
Bull
- 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
Bear
- Biotechnology sector is inherently more volatile than wider equity indices
- Political interference in the sector can add to volatility
- Gearing levels can be detrimental to performance