Biotech Growth is top trust on 10th anniversary

The trust's stellar results have so far confounded biotech bears nervous about unsustainable highs delivered by the sector. In 10 years BIOG has returned 721.3 per cent, compared with runner up and biotech rival International Biotechnology Trust (IBT), which returned 440.9 per cent, and the FTSE All World, which posted returns of 149.6 per cent in that time.

BIOG is a member of the IC's Top 100 Funds and one of the largest and longest-established funds in the sector, with £533.1m in assets under management. Its performance has been impressive over the long and short term but can be volatile. It was hailed as a choice for "diehard bulls" by Oriel Securities earlier this year due to its gearing of 9.4 per cent (meaning it takes on larger amounts of debt than others) and concentrated portfolio.

Anthony Stern, an analyst at Oriel Securities, downgraded BIOG to a neutral rating in February after four months of a tightening discount, citing rival fund International Biotechnlogy (IBT) as a more cautious alternative due to its ungeared portfolio and significant discount.

The rival fund is the second best-performing trust in the past 10 years and has outperformed BIOG in the past two years. It returned 15.6 per cent in the year to date and almost 50 per cent in 2014. At a discount of 13.17 per cent, it compares favourably to BIOG.

However, there is little doubt that long-term holders of BIOG would have earned better returns than other investment trusts and biotech bulls say there is plenty more scope for growth, despite market nervousness.

The fast-growing, though volatile, sector was one of the best performing last year, with many biotech trusts rising by over 40 per cent. In the five years to February 2015 the Nasdaq Biotechnology Sector increased by 300 per cent compared with 60 per cent from the FTSE 100, according to Oriel. Since inception the Nasdaq Biotechnology Index has returned 415.1 per cent, compared with just 155.6 per cent from the Nasdaq 100 index.

Even fund managers previously unenthusiastic about biotech have been turned onto it in recent years, spurred on by companies' pipeline of drugs and the mapping of the human genome, which has led to more targeted drug development.

BIOG is tapped into some of the best new opportunities in drug development. It has a 6.7 per cent holding in pharma giant Gilead Sciences (0QYQ), which is developing hepatitis C medication, as well as a 4 per cent holding in Illumina (US: ILMN), which makes genomic testing machines. The fund credits Horizon Pharma (US: HZNP) and Receptos (US: RCPT) for recent performance after shares of both appreciated throughout the beginning of the year.

The biotech market is dominated by large caps and the large companies in the marketplace have a strong pipeline of new drugs in development. That, combined with more liberal US Food and Drug Administration policy, has meant stocks in the sector have high predicted earnings growth.

But the market is still divided over whether the good times can keep coming or whether a correction lies up ahead. The head of OrbiMed Capital Partners, which manages BIOG, warned in March that there were signs of overheating in the small-cap biotechnology sector and more broadly it remains a volatile sector.

That is partly due to its high concentration. The Nasdaq Biotechnology Index contains 118 securities and the top 10 constituents account for almost 60 per cent of the index. That means that the portfolios of the main biotech funds are quite concentrated. BIOG has just 41 holdings, with the top 10 making up 55.1 per cent of its portfolio.

But BIOG is exposed to large-cap players with larger pipelines and revenues. That is a better play than backing less profitable, smaller players attempting to bring smaller numbers of drugs to market and exposed to more risk if they do not win approval.

Performance in calendar year total return (%) of biotech trusts and index

Source: FE Trustnet, as at 18 May 2015

Cumulative total returns (%) for BIOG and index

Source: FE Trust Net

BIOG top 10 holdings

Source: biotechgt.com