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. This is a specialist area, but one that exhibits strong trends which are unlikely to be blown off track by COVID-19.
As we discuss in the Portfolio section, IBT has a unique position in the trust universe, given that it invests in both listed and unlisted companies (through a venture fund). Within the listed-equities portfolio, the team take a highly active multi-cap approach. Investee companies need to have strong pricing power, experienced management and financial strength.
Many characteristics that the managers prefer also make companies attractive targets for M&A. Within the biotechnology sector, M&A is a persistent tailwind for valuations. Since December 2017, IBT has seen 11 completed acquisitions at an average premium of 63%.
A key part of the investment philosophy is to manage risks – which is reflected in the lower NAV volatility over five years relative to the benchmark – while still showing outperformance. A key element to this is the managers’ tendency to de-risk exposures to companies in the run-up to significant drug-trial results announcements.
IBT pays a dividend of 4% of NAV each year (at the end of August) from capital. As we discuss in the Dividend section, IBT employs a growth strategy, and as such provides a very different (and potentially diversifying) underlying exposure to that provided by equity-income funds.
We view the biotechnology sector as currently having attractive dynamics. As we highlight in the Performance section, the sector has underperformed wider equity markets and is at historically low P/E valuations relative to history and to the wider market.
As we discuss in the Portfolio section, the sector has secular tailwinds which make it unlikely that future prospects for companies will be dampened by COVID-19. Also, any remaining uncertainty over the US presidential election will be resolved by December. As such, the sector’s prospects look relatively bright, and this perhaps explains why the trust has performed strongly both on a relative and absolute basis so far this year.
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. Also, the level of the dividend is attractive relative to that of other equity-income sources. For example, the AIC Global Equity Income investment-trust peer group has a historical yield of 3.8%.
IBT’s discount widened out considerably during March, but it has now narrowed back to 2.8%. The board recently made its first buybacks since September 2016, showing that it remains engaged in protecting investors from discount volatility. IBT is a differentiated proposition in a sector which should have secular tailwinds.
|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-focussed investment process has seen the trust deliver outperformance of the benchmark over five years, and with lower volatility|