The three trusts in the IT Biotechnology & Healthcare sector with a track record of 10 years or more are among the top five performers on a net asset value (NAV) basis across the entire investment trust universe, FE Trustnet can reveal.
According to data from the Association of Investment Companies (AIC), Biotech Growth Trust, Worldwide Healthcare Trust and International Biotechnology Trust all made top five NAV returns over the past decade to the end of July 2017.
Winterflood Investment Trusts analyst Kieran Drake, said: “I think the healthcare sector as a whole – not just talking about the trusts but the indices – has performed very well over the last 10 years.
“There has been a lot of innovation and it is probably a part of that shift from big pharma developing drugs to the growth of biotechnology has been a very strong area.
“Two of the three trusts focus on biotech and Worldwide Healthcare also has an allocation to biotech so I think that is one of the drivers.”
The sector has returned 423.48 per cent on a total return basis over the past 10 years, while the MSCI World Health Care index – a comparable benchmark – has returned 264.16 per cent.
Performance of sector vs index over 10yrs to 31 July 2017
Source: FE Analytics
Drake said he expects the sector to continue outperforming “with a number of the tailwinds it has enjoyed for much of the last decade still in place”.
“I think demographics are still positive in terms of the healthcare sector – in terms of an ageing population and the scientific advances that are being made tend to open up more routes for developing new drugs and treatments,” he explained.
While valuations of biotechnology companies may look more expensive globally than other sectors, Drake said they were reasonable when considering the growth potential.
Additionally, US healthcare stocks are currently trading at discounts relative to the broader market making them an attractive proposition for investors, he added.
Below, FE Trustnet explores the IT Biotechnology & Healthcare sector further as part of its series, in which we strip out share price movement to find the best performing trusts based on NAV alone.
Previously we have considered the trusts in the Global and Global Equity Income, UK All Companies and UK Equity Income, and UK Smaller Companies sectors that are among the top 50 investment companies by NAV return over the last 10 years.
The top performer in the closed-end fund universe by NAV returns in the decade to 31 July 2017 is the £532m Biotech Growth Trust. The trust has returned 675.25 per cent over 10 years, according to data from the AIC. Once share price gains have been added this return lifts slightly to 677.13 per cent, as the below chart shows.
Performance of fund vs sector and index over 10yrs to 31 July 2017
Source: FE Analytics
Overseen by OrbiMed Capital managers Geoffrey Hsu and Richard Klemm, the trust’s portfolio is 90.7 per cent weighted to the US and has 35 holdings.
“The Biotech Growth Trust is a highly impressive investment trust, not only providing exposure to a fascinating asset class and a secular growth story, but also as a result of the nature of its investment management team,” Winterflood’s Drake said.
“OrbiMed is a well‐resourced and experienced firm that only invests in the Healthcare sector. In our opinion its expertise provides a significant advantage in a specialist asset class and goes some way to alleviate the considerable risk involved in investing in biotechnology companies.
“We believe that the Biotech Growth Trust is the most attractive way to invest in the healthcare sector, particularly for investors who can tolerate a higher level of volatility and risk.”
The trust has gearing of 1 per cent and is trading at a 5.3 per cent discount to NAV. It has an ongoing charge of 1.1 per cent, according to the latest data from the AIC.
The second-best performer in the investment trust universe for NAV returns is £1.3bn Worldwide Healthcare run by Samuel Isaly and Sven Borho, also of OrbiMed Capital.
Over 10 years the trust has paid out 456.78 per cent on a NAV basis and has delivered a total return of 500.98 per cent when share price movements are taken into account. This is 236.82 percentage points ahead of its MSCI World Health Care benchmark.
Performance of fund vs sector and index over 10yrs to 31 July 2017
Source: FE Analytics
The four FE Crown-rated trust is 62.3 per cent weighted to the US, with 16.9 per cent in Europe and 11.9 per cent in emerging markets. On a market capitalisation basis, it is weighted 70.5 per cent towards large-cap stocks and 29.5 per cent in small caps.
The trust is a top pick from analysts at Numis Securities – who called it their favoured fund in the sector – and remains an “attractive vehicle for investors looking for a diversified portfolio of innovative healthcare companies”.
“The fund has an excellent long-term track record through stock-picking based on fundamental research, and it has typically been less volatile than most of the listed peer group, which tend to focus on biotech,” Numis analysts noted.
“Healthcare stocks struggled in late 2015 and 2016 after a strong run since the financial crisis. However, 2017 has seen the sector rebound and investor demand has led to Worldwide Healthcare trading at around NAV.”
Indeed, according to the AIC, the trust is currently trading at a premium to NAV of 0.6 per cent, it is 14 per cent geared and has charges including performance fees of 1.38 per cent.
The final fund in our study is the £240m International Biotechnology Trust run by Carl Harald Janson, which has a greater income bias than the other two strategies.
In December last year, shareholders voted in favour of the board’s proposal to convert some of its capital growth into income going forward. The move was well received by the market and has seen the trust’s discount come in sharply from 15.6 per cent to its current level of 4.7 per cent.
Over the 10-year period it has made NAV returns of 352.46 per cent, with the total amount paid out rising to 344.47 per cent once share price movements are taken into account.
Performance of fund vs sector and index over 10yrs to 31 July 2017
Source: FE Analytics
The trust is 83 per cent weighted to North American companies with 17 per cent in Europe ex UK. On a market capitalisation basis, it has a 50 per cent weighting to large caps, 27 per cent in mid caps and a further 23 per cent in small caps.
Analysts at Kepler Intelligence Trust noted: “[The trust] offers an income drawn from capital supported by the long-term trajectory of the trust’s NAV, which has been demonstrably strong.
“The managers are focused on growth companies, so the portfolio has a natural slant toward the small and mid-sized businesses which are most likely to be beneficiaries of any uptick in M&A.
“With short-term tailwinds in mind, the long-term case for IBT – particularly now that it pays a regular income – is supported by the demographics which support the whole sector.
“An older, chubbier population and the rapidly increasing need for drugs – along with the rapidly improving technology which allows for their development – are a strong argument for a well-managed long term holding in the sector.”
The trust has no gearing and offers investors a yield of 3.8 per cent, according to the AIC. It has charges including performance fees of 1.68 per cent.