When markets are in disarray investors seek out defensive investments, and top of the list is big pharmaceuticals. But the healthcare landscape is changing. Large pharmaceutical companies are increasingly losing ground to more youthful dynamic competition when it comes to medical innovation. Some analysts even argue that big pharma can no longer be viewed as a defensive given that healthcare in Europe is provided largely by government and with governments in most of the Western World tethering on the point of bankruptcy, spending in the sector is due to be rationalised. As costs get squeezed out of the system both in Europe and the US, pharmaceuticals are bound to feel the pain.
- Wide discount
- Lower fees
- Strong performance
- Currency risk
- Volatility
IC TIP RATING
Type style: Growth
Risk rating: High
Timescale: Long term
The implications of the economic austerity measures for the sector is immense, not to mention issues such as increasing life expectancy, the challenge of treating modern day diseases and the threat from emerging markets as China and India start to invest in R&D. The only solution is to innovate and here biotechnology companies offer opportunity. Returns tend to be uncorrelated and as a high beta sector, biotechnology can also offer welcome protection against rising inflation.
The International Biotechnology Trust (IBT) offers investors a route into the new biotechnology-derived drugs and technologies emerging. Managed by SV Life Sciences (SVLS), the fund is focused on development stage biotechnology companies that are quoted or unquoted with the potential for high growth.
Despite continuing market volatility, IBT has announced impressive results for the year ending 31 August 2011. The investment trust's quoted portfolio returned 13.5 per cent over this period, showing an increase in net asset value (NAV) of 5.6 per cent, while the share price increased 6.9 per cent versus the FTSE All-Share index that increased 3.8 per cent. The discount, while narrowing slightly, still presents an attractive buying opportunity at -12 per cent.
This is markedly wider than the fund's peer group average which is made up of three competitors: Orbimed's Worldwide Heathcare Trust and Biotech Growth Trust and the Polar Capital Global Healthcare Fund. While these are all strong performers, IBT benefits from having both a quoted portfolio and unquoted portfolio, with last mentioned providing exposure to new innovations and venture-type vehicles but with the benefit of liquidity.
Admittedly over the last year most of the returns have been driven by the quoted portfolio. David Pinniger, who has managed the fund since joining SVLS in April 2008, has constructed the quoted portfolio to give investors exposure to the best investment opportunities in a global industry sector that has outperformed the broader equity market (as measured by the S&P500) over the long-ter, although the majority of the fund's investments tend to be in US.
This year, a number of changes have been agreed along with the annual results, including a reduction in the annual management fee charged on the NAV from 1.35 per cent to 1.15 per cent. The performance fee on the quoted portfolio has also changed - the new fee will be 10 per cent of outperformance over the Nasdaq Biotech index, which means a performance fee can only be earned when the fund generates a positive NAV return. These changes, combined with a number of cost savings, should enable the fund to reduce its higher than average total expense ratio (TER) going forward. This should enhance future returns, particularly when the savings are compounded over longer periods.
While there is the issue of currency risk, given that many of the fund's underlying holdings' earnings are in US dollars, the fund should benefit from compelling valuations in the sector. The unquoted portfolio is maturing well and merger & acquisition (M&A) activity in the sector should drive performance. BUY.
| INTERNATIONAL BIOTECHNOLOGY (IBT) | |||
|---|---|---|---|
| PRICE | 150.50p | NAV | 171p |
| AIC SECTOR | Biotech & Healthcare | PRICE DISCOUNT TO NAV | -12% |
| FUND TYPE | Investment Trust | 1-YEAR PRICE PERFORMANCE | 8.1%* |
| SIZE OF FUND | £95m* | 3-YEAR PRICE PERFORMANCE | 27.9%* |
| No OF HOLDINGS: | 68 | 5-YEAR PRICE PERFORMANCE | -3.7%* |
| SET UP DATE | 6 May 1994 | TOTAL EXPENSE RATIO | 2.16%** |
| BETA | 0.49% | YIELD | 0.00% |
| GEARING | 101 | MORE DETAILS | internationalbiotrust.com |
Source: Investors Chronicle, *Winterflood
Performance figures as at 28 October 2011
**Includes performance fee. Should be coming down soon.
| Name | Percentage |
| Amgen Inc | 5.9 |
| Cadent | 5.4 |
| Teva Pharmaceuticals | 5.3 |
| Gilead Sciences Inc. | 5.1 |
| Insulet Corporation | 4.3 |
| Pharmasset, Inc. | 4.3 |
| Celgene Corporation | 4.1 |
| Shire Plc | 4.0 |
| Micromet Inc. | 3.3 |
| Axis-Shiled Plc. | 3.3 |
Geographic breakdown
| Country | Percentage (%) |
| US | 75 |
| Europe | 18 |
| Israel | 5 |
| Australia | 2 |
Source: Winterflood Securities
