Sell Biotech Growth to make most of biotech profits

IC TIP RATING

Tip style: GROWTH

Risk rating: HIGH

Timescale: LONG TERM

The biotechnology sector has demonstrated incredible growth in recent years, with the Nasdaq biotechnology index increasing by 300 per cent since 2010 compared with 60 per cent from the FTSE 100 sector according to Oriel Securities. There is strong evidence to suggest valuations are good too, with the twin drivers of new product pipelines and M&A potential in Europe adding to the sector's appeal.

It is definitely not the time to abandon biotech. But it could be a good time to sell Biotech Growth Trust at 707.13p while its discount is tightening and performance is solid, to take some risk out of your portfolio by investing in a fund with a broader focus. Over five years Biotech Growth has delivered a total return of 368.5 per cent compared with the Nasdaq Biotech index return of 291 per cent and over three years has returned 206.8 per cent compared with 192.3 per cent for the index. After trading at discounts between 5 and 10 per cent for the majority of 2014 it slipped into premium territory in December before sliding back to a 3.82 per cent discount this week.

After such strong increases, it could be time to balance your portfolio again by taking profits and opting for Schroder Global Healthcare A Acc (GB0003880183), one of the best performing funds of 2014. The fund has a reasonable ongoing charge of 1.69 per cent, lower than Biotech Growth's 2.09 per cent, and its access to pharmaceutical and medical services companies gives a broader, and less risky, base for long-term growth. The fund has already demonstrated healthy long-term growth, with cumulative returns of 215.1 per cent over 10 years compared with 223.9 per cent for the MSCI AC World Daily Gross Health Care index and 114.4 per cent over five years compared with 125.8 per cent for the index.

Manager Martin Bowler aims to achieve a balance between defensive areas such as large-cap pharma stocks as well as riskier elements like medical devices and the strategy has paid off. American pharaceutrical giant Merck & Co is the fund's largest holding, followed by Johnson & Johnson and United Health.

The fund is also more geographically diverse and less dependent on US stocks than Biotech Growth, which dedicates 90 per cent of its portfolio to US stocks as opposed to 65.7 per cent for Schroders.

However, if you are determined to stick with a narrow biotechnology offering, and are a fan of investment trusts, consider a more cautious option such as International Biotechnology Trust (IBT) which also has a lower exposure to the US than Biotech Growth and is ungeared, unlike Biotech Growth at 9 per cent. The trust's discount has also been narrowing but is still much more tempting than peers. Last year the fund hovered at around a discount of 16 per cent but reduced to almost 2 per cent at the beginning of the year. It is currently trading at a discount to NAV of 12.87 per cent. The trust is also on the brink of reducing its management fee from 1.15 per cent to 0.9 per cent in March 2015, making it a cheaper option.

Schroder Global Healthcare

Cumulative performance (%)

Source: Schroders

Top 10 holdings (as at 31 January 2015)

Sector breakdown