According to figures compiled by the AIC, the trust is trading on an 8.5 per cent discount compared with a one-year average of -0.4 per cent – and it was even on a premium earlier this year.
The managers have a policy of defending the discount at 6 per cent, meaning that the risk of a widening discount is limited and a share buyback could be imminent.
Innes Urquhart, research analyst at Winterflood, says that there is no obvious reason for the discount to have widened out and that the trust remains the group's recommendation in the space.
"I think it could just be a question of the share price having not quite kept pace with the NAV," he said.
"At the start of June, the market came off a little bit and the share price hasn’t really recovered. Over the past couple of months, it [the discount] has widened out."
Over the short- and long-term, the trust’s performance is outstanding.
An extremely strong 12 months for the portfolio has seen its NAV rise by 50 per cent; the share price has risen by 38.4 per cent in the same period.
The trust’s benchmark, the NASDAQ Biotech index, has grown by 49.46 per cent in this time, in line with the NAV performance, but well ahead of the share price.
Performance of trust vs sector and benchmark over 1yr
Source: FE Analytics
Over three- and five-year periods, the trust has substantially outperformed its benchmark in both share price and NAV terms.
Performance of trust vs sector and benchmark
| 3yr (%) |
5yr (%) | 10yr (%) | |
|---|---|---|---|
| The Biotech Growth Trust Share Price | 170.63 | 228.66 | 415.72 |
| The Biotech Growth Trust NAV | 164 | 239 | 442 |
| Nasdaq Biotech Cap | 144.00 | 183.56 | 169.88 |
Source: FE Analytics
Data from FE Analytics shows that the share price has risen by 170.63 per cent over three years and the NAV by 164 per cent; the index has returned just 14 per cent over that time.
"The manager has a great track record and it’s obviously an area where there’s high stock-specific risk, so a fund like the Biotech Growth Trust is a good way to play that because you are effectively handing over management to a very experienced team of people who have delivered great results for a long time," Urquhart said.
The strong performance by the sector saw shares in the trust in demand earlier in the year, and Urquhart points out they were trading on a premium.
However, when markets wobbled over the summer, demand weakened, even though NAV performance has remained strong.
In July, the fund’s NAV rose 14 per cent, but the share price only 7.7 per cent.
It may be that there has been less appetite for risk in the markets over the summer, with fears over the end of QE in the US, a potential war in Syria and the slowdown in emerging markets.
Urquhart says that many people may have decided to bank their substantial gains.
"There might have been some profit-taking; it has done very well and the nature of the market means there’s always the potential for a one-off problem at a company to have a big effect – if they have a drug that fails its trials, for example."
"But over the longer term, we think Orbimed adds value to the sector and the sector is one where most investors are probably not that well-informed, so are better off with a manager."
Biotech Growth Trust is a £281m trust with 43 holdings in the biotechnology sector. Although it has the freedom to invest worldwide, it is 94.2 per cent invested in North America.
The companies it holds are involved in developing and testing new treatments, which has the potential to make them extremely lucrative. The reverse of this is that when products fail trials, the firms can take a large hit.
The fund’s largest holding, at 10.2 per cent of AUM, is Celgene, a company that researches treatments for cancer and inflammatory diseases.
The company reported positive results from a phase-three trial of a drug called Revlimid, which would be used to treat myeloma patients.
Gilead Sciences is the second-largest holding, at 9.4 per cent of the fund, and the company has recently published strong second-quarter results. It is doing well off the back of products used to treat HIV and Hepatitis C.
Co-manager Geoff Hsu – his colleague is Richard Klemm – told FE Trustnet last autumn that the US authorities were becoming keener to approve drugs quickly, which should be a supportive trend for his sector.
This week saw further evidence of this, with the FDA publishing surprisingly achievable conditions for the sale of generic versions of a major anti-asthma drug sold by GlaxoSmithKline. The result has been a 3 per cent fall in the pharmaceutical giant's shares, and the episode underlines the dynamic currently on display in the sector.
The large drug companies are suffering from a weak pipeline of new drugs and are stepping up their efforts to replace them.
One way to do this is through the acquisition of smaller companies with research that is showing promise, and such M&A activity is another factor that investing in the biotechnology sector brings.
Orbimed, the managers of the trust, are specialists in the arena of healthcare investing, and have been in charge of the trust since 1997.
Performance of trust over 15yrs
Source: FE Analytics
The sector suffered during the dotcom crash of the early 2000s, but has performed extremely strongly since then, with the trust returning 17.7 per cent a year over the past decade.
According to the AIC, ongoing charges are 1.3 per cent before the performance fee, and amounted to 2.8 per cent for the year ending in March.
