Top 100 Funds update: Buy healthcare on a discount

No wonder then, that the MSCI World Health Care index has risen 47.4 per cent over three years. But IC Top 100 Fund Worldwide Healthcare's total return has thumped the index, showcasing a healthy 62.6 per cent return over the period, meaning if you had invested £100 in the fund three years ago, you would now have £162.60. And it's done better over a one year period, too, in which it has returned 34.9 per cent.

The fund strives for maximum growth potential. To achieve this, it invests in a diversified portfolio of shares in pharmaceutical, biotechnology and related companies in the healthcare sector. It also uses gearing and derivative transactions to mitigate risk and also to enhance capital returns.

More people are going to consume more drugs over the coming decades as life expectancy grows and certain types of disease become more prevalent. This will be particularly evident in emerging markets where growing wealth means increasing numbers of people will have access to healthcare.

Their adoption of western lifestyles and diets means they will also suffer from diseases prevalent in developed countries such as diabetes, which is often related to obesity. Diabetes is already a considerable problem in India, while HIV and Aids are growing problems in China. With populations in excess of 1bn people, potentially big markets are developing in these and other emerging markets.

Investment manager Samuel Isaly at OrbiMed Capital seizes these opportunities by using a bottom-up fundamental research method to select ideas from across all major geographical markets. The trust is 63 per cent invested in the US, with a 19 per cent weighting to Europe - and a more cautious 9.7 per cent and 7.7 per cent allocation to emerging markets and Asia respectively.

A disciplined portfolio construction process is utilised to ensure that the portfolio is usually focused on 50 to 60 "high conviction" positions, although it currently has 65. And the portfolio is subject to a rigorous risk-management process to moderate portfolio volatility.

Its top holdings include Gilead Sciences, Pfizer and Sanofi, although two big names normally associated with healthcare - GlaxoSmithKline and AstraZeneca - are nowhere to be seen in the top 10 holdings. Mr Isaly has not owned AstraZeneca for over 10 years. And while he bought a small number of shares in GlaxoSmithKline last year, he has kept this small due to other portfolio positions having performed better.

The trust is trading on a discount of 4.54 per cent to its net asset value (NAV). Its solid performance and attractive discount make it look very attractive compared with rival fund Polar Capital Healthcare (PCGH), which is currently on a premium of 3.7 per cent.

However, over the past month the trust has been issuing shares at a discount to NAV - there have been three instances of this since 24 April.

The trust has been issuing extra shares over the past couple of weeks due to increased demand from retail investors - both from platforms and discretionary managers. Its management group, Frostrow Capital, puts this down to the strong performance of the shares and the healthcare sector in general. It has 318,408 shares left in the treasury, but this will be "wiped" in July. Frostrow says the issuing of shares could limit the narrowing of the discount depending on how aggressively they are issued, although the fund is unlikely to trade on a premium until this point. Given the solid NAV performance, the shares are still a good prospect.