Many fund managers like to draw attention to the household names in their portfolio, often in the hope that investors will associate with them the same dependability of the products and brands they use on a daily basis.
However, Svetlana Viteva, deputy manager of the Edinburgh Worldwide Investment Trust (EWIT), takes the opposite approach, saying: “When you go through the holdings in our portfolio, you hopefully won't recognise most of the names.
“Because if you do, frankly we're probably not doing our job.”
EWIT is run by the same team behind the top-performing Baillie Gifford Global Discovery fund, headed up by FE Alpha Manager Douglas Brodie.
Performance of fund vs sector under management tenure
Source: FE Analytics
It invests in companies with a market cap of less than $5bn, including unlisted firms, which have the potential to become “the winners of the future”. However, Viteva (pictured) does not characterise her holdings as smaller companies, saying most of these are destined to remain small
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“That's because they are ‘me too’ businesses which don't have competitive differentiation from their peers, or because they have little scope to innovate, because they're operating in industries which are structurally not growing,” she explained.
“These are not the companies we are interested in. The ones we are intrigued by are young, entrepreneurial, innovative businesses. And it's their immaturity really which intrigues us rather than the smallness per se.”
The reason for investing in these types of company is the asymmetric return profile they offer.
Viteva highlighted a chart showing the history of the cumulative returns EWIT has generated since Baillie Gifford took control of the trust in 2014. It shows numerous holdings where the trust lost all of the money it invested, which the manager described as “inevitable” with a portfolio of immature businesses. However, she does not necessarily view these investments as failures.
“We think of this as experimentation,” she said. “These have been hugely valuable in their own right, because they have helped develop and further our thinking across a number of subjects.
“The really interesting thing about that chart is that when you take our 10 poorest performers and you compare them against our 10 biggest winners, they barely register.
“Just one of our winners is enough to more than handsomely pay off for that long tail of experimentation that we've got.”
As a result, Viteva said that when the team thinks about risk, it does not agonise over getting something wrong, but about whether it has cast the net wide enough to capture all the potential winners. This is why EWIT’s portfolio has a low concentration, typically containing between 75 and 125 holdings.
One of the companies the manager is particularly excited about at the moment is NovoCure, which she discovered when carrying out some background research ahead of an academic life sciences conference in Tel Aviv.
The manager said that seeing what the company does feels like entering the realms of science fiction.
“The product that they have today [Optune] effectively looks like an electric helmet,” she explained. “And the next thing they do is say, ‘oh, and it cures brain tumours’. And you already think, ‘okay, you're crazy’.
Viteva described NovoCure as “right at the intersection of physics and biology”, using low frequency alternating fields to disrupt cancer cell growth.
The idea behind it is that when a cell tries to divide, it releases proteins which are some of the most charged particles in the human body. Meanwhile, the laws of physics say that creating an electrical field around a charged particle will exert force on it.
Company founder Yoram Palti’s original hypothesis was that surrounding a tumour cell with an electrical field as it tried to divide would stop that division from happening – and the effort of trying to divide would make the cell self-destruct.
Viteva said NovoCure has demonstrated efficacy in every cell line of solid tumour. The tumour needs to be solid as the electrical field has to surround it, so it cannot be used to treat blood cancers. However, 90 per cent of tumours are solid.
“When I met them, they already had this therapy approved for the treatment of glioblastoma which is by far the most aggressive cancer,” said the manager. “Survival rates are extremely poor, it’s 5 per cent survival over five years, so it's really a death sentence.”
“But NovoCure was suggesting that the five-year survival rate could go up by six times if you use this type of treatment. You literally put these patches on your head and you carry around a portable electric fuel generator.
“It really is quite small, it's around a kilogram, it's actually lighter than a laptop.
“And the thing that really appealed to me is that this is not chemistry, it's not another drug. You are not giving more drugs to someone who has gone through chemotherapy, radiation or surgery.
“It has no impact on you, there are no side effects, other than maybe having a rash from the patches on your head. The data really starts to speak for itself.”
EWIT first invested in NovoCure a year and a half ago, allocating between 0.6 and 0.8 per cent of its assets under management. Viteva said excitement was already building in the medical community about the glioblastoma treatment, which coincided with reimbursement rates coming through and both private and public health services beginning to cover payment for the service.
Following further meetings with NovoCure management, this has now increased towards 1.5 per cent of the portfolio.
“You look at their pipeline and they have a clinical trial on pretty much every single solid tumour out there,” Viteva added. “The opportunity really is incredible. It is really platform technology in the purest sense.”
Data from FE Analytics shows that EWIT has made 128.17 per cent since the Baillie Gifford team took control of the trust, compared with 87.78 per cent from the IT Global sector. However, investors should note its approach means it is highly volatile and its drawdown of 27.66 per cent is the second-highest in the sector over this period.
Performance of trust vs sector under management tenure
Source: FE Analytics
The trust is on a premium of 1.93 per cent, compared with a premium of 1.41 per cent and a discount of 3.79 per cent from its one- and three-year averages. It has ongoing charges of 0.81 per cent and is 7 per cent geared.