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BACIT proposed strategy change would increase its risk/return potential

BACIT investment trust is proposing a radical change to its investment strategy, which would considerably increase its risk, return profile
November 17, 2016

IC Top 100 Fund BACIT (BACT) is proposing to change its investment strategy to focus on early-stage life sciences companies, which would increase the potential for higher returns but also considerably increase its risk profile.

BACIT currently invests in more than 30 funds across various asset classes and has proved successful at preserving wealth. Since launch, its net asset value (NAV) total return is up 36.1 per cent, behind the FTSE All-Share index's 38.2 per cent and MSCI World Index's 81.6 per cent. But it has made a positive NAV return in each of the full calendar years following its launch in October 2012, as well as in the year to date. The trust has delivered returns with low correlation and typically outperformed in falling equity markets.

BACIT also donates 1 per cent of its NAV each year to charity - half each to The Institute of Cancer Research and The BACIT Foundation.

But BACIT now proposes holding and financing life science investments until they reach commercialisation and beyond, with a view to building standalone companies capable of achieving valuations in excess of £1bn. To do this it wants to acquire healthcare company Syncona, which develops and finances life science technologies, and recruit Syncona's investment team. Syncona has seven investments in areas such as gene and cell therapy, which BACIT says have the potential for significant upside. To reflect this, BACIT proposes changing its name to Syncona.

BACIT also proposes acquiring all or a majority of Cancer Research UK's interest in CRT Pioneer Fund, a £70m venture life sciences fund that aims to bridge the investment gap between cancer drug discovery and early development. BACIT has already committed up to £20m to CRT Pioneer.

BACIT would then invest approximately £100m in life science investments a year, until most of its gross assets are invested in this area. At least 25 per cent of its life science investments would be oncology projects and businesses. But BACIT would continue to make investments in alternative investment funds until such time as it requires financing for specific life science investments, and its current investment manager, BACIT UK, would manage these funds.

The transition would be put into effect over eight to 10 years.

Over the longer term, BACIT would target a shareholder return of 15 per cent and continue its progressive dividend policy. It currently targets an annualised return per share in the range of 10 to 15 per cent a year on the issue price of the shares.

BACIT says it wants to change its investment approach to capture the significant value opportunity in UK life science and medical innovation.

"We launched BACIT to boost drug discoveries in the fight against cancer," says Tom Henderson, founder and manager of BACIT. "That aim evolved into our investment, alongside Cancer Research UK, in the CRT Pioneer Fund. The same logic has given rise to this transaction, which will create a national champion of life science investing."

The new mandate would offer access to venture capital investments private investors cannot access directly.

If BACIT's shareholders approve the changes at a meeting in December it will place new ordinary shares worth £319m with charitable foundation Wellcome Trust, meaning it holds more than 30 per cent of the trust's shares. It would also issue shares worth £17m to Cancer Research UK, and make a placing and open offer of ordinary shares subject to a cap on its net asset value (NAV) of £1bn. BACIT currently has assets of about £500m.

BACIT shares would be issued at a price equal to 101.35 per cent of the trust's NAV per share at the time of the placing to avoid diluting existing investors' holdings.

Shareholders who don't want to stay in the trust would have the option of selling their shares at the offer price less dealing costs, and for the changes to go ahead the number of ordinary shares sold in the placing and open offer must at least match the number of ordinary shares offered for sale under this liquidity facility.

 

Stay or go?

BACIT may not continue to be suitable for all of its current shareholders, for example those that have a low risk appetite and/or a short-term investment horizon.

"If the strategy change is approved by shareholders, the return profile of the fund is likely to change significantly and we would therefore not be surprised if a number of existing shareholders reconsider their exposure given the high risk, high potential return of the strategy going forward," say analysts at Winterflood.

Simon Elliott, head of the investment trust research team at Winterflood, says shareholders need to consider why they are holding this trust and what role it is performing in their portfolios . "If you bought this trust for low volatility, and steady absolute returns, it may not fit into your portfolio any more," he says.

David Liddell, chief executive of online investment service IpsoFacto Investor, adds that investors need to consider what else they have alongside it in their portfolios. "If you hold this for wealth preservation you will need something else," he says.

He says options for investors seeking a wealth preservation alternative to BACIT include Ruffer Investment Company (RICA), Personal Assets Trust (PNL) and Capital Gearing Trust (CGT). Or they could add an absolute return fund such as Standard Life Global Absolute Return Strategies (GB00B7K3T226) or Invesco Perpetual Global Targeted Returns (GB00BJ04HL49).

Also see our IC Top 100 Funds for wealth preservation fund suggestions.

Other considerations are the risk that the trust could move out to a wider discount to NAV if it fails to deliver expected returns over the medium to long-term, as it would hold illiquid investments. But Charles Cade, head of investment companies research at Numis Securities, doesn't expect it would be as wide as the double-digit discounts many private equity investment trusts trade on.

The trust's ongoing charge could also rise because investing in venture capital tends to be more expensive than investing in other funds or shares, and it also plans to recruit several new directors. The Syncona investment management team, which would run BACIT's life science investments, is expected to cost up to 1 per cent of NAV a year, while current manager BACIT UK would continue to be paid a fee of 0.19 per cent a year, which would fall to 0.15 per cent after five years.

BACIT's current ongoing charge is 0.28 per cent, or 1.28 per cent if you add in the donation to charity.

And BACIT plans to reduce its annual charitable donation from 1 per cent of NAV a year to 0.3 per cent, which it says would take account of its larger size. However, it would ensure that for the two financial years following the financial year ending 31 March 2016, the annual charitable donation would not be less than the amount donated for its financial year ending 31 March 2016.

BACIT (BACT)
PRICE126.5pGEARING0%
SECTOR Flexible InvestmentNAV129.2p
FUND TYPEGuernsey domiciled investment companyPRICE DISCOUNT TO NAV2.10%
MARKET CAP£488mYIELD1.7%
No OF HOLDINGS33*ONGOING CHARGE1.28%
SET UP DATE26/10/2012*MORE DETAILSwww.bacitltd.com

Source: Winterflood as at 16 November 2016

*BACIT UK

Performance

6 month share price return (%)1 year share price return (%)3 year cumulative share price return (%)
BACIT-5-210
Flexible Investment sector average101420
FTSE All Share101415
FTSE World ex UK213147

Source: Winterflood as at 16 November 2016

TOP TEN HOLDINGS as at 30 September 2016 (%)

Polygon European Equity Opportunity6.5
Polar Capital Japan Alpha6.1
Majedie UK Equity5.9
Tower Master Fund5.1
Maga Smaller Companies UCITS5
Sinfonietta4.9
Parity Value4.9
Polygon Mining4.5
The SFP Value Realization Fund4.5
SW Mitchell European4.5

Asset allocation (%)

Equity hedge37
Equity long bias20
Macro13
Credit11
Private equity6
Commodity5
Fixed income 4
Infrastructure3
Cash1

Source: BACIT UK