The biotech sector has suffered a significant correction in the past couple of months having been the standout performer of the previous year. Tan (pictured) says that this correction has left behind a buying opportunity, and investors can get access to it cheaply through the BB Biotech trust.
“I’m not saying this sector will be able to go up 50 per cent per annum again, in fact, the correction which we have seen is probably healthy,” he said.
“But this is a longer term story that we believe in and these are the guys to stick with.”
“If you believe you need to have expert management in this volatile sector, we believe the board and management team in general come across as being highly qualified and closer to where they need to be.”
“The core of the team is based in Zurich where Novartis and those other Swiss pharma giants are based and all of them have a background in academic or financial analytics of pharmacology.”
BB Biotech is trading on a discount of 14.7 per cent, compared to 4 per cent for the Biotech Growth trust and 1.2 per cent for Worldwide Healthcare Trust.
International Biotechnology is on a 17.2 per cent discount, but this portfolio has been suffering more than its peers.
The discounts have widened on all these trusts over the past year with the exception of BB Biotech, which has a one-year average of 22.6 per cent.
This is remarkable given the ructions in the Biotech sector that saw the NASDAQ Biotechnology index fall over 20 per cent since the end of February.
Performance of indices in 2014
Source: FE Analytics
The correction followed a rip-roaring period for the sector. Open-ended AXA Framlington Biotech is still the top-performing portfolio over three years in the entire IMA sector, having returned 110.6 per cent.
The closed-ended Biotech growth Trust is up 154.23 per cent over the same period, while the other funds have failed to beat the index. BB Biotech has made 134 per cent over that time.
Performance of trusts over 3yrs
Source: FE Analytics
One of the reasons for it trading on such a wide discount relative to its peers despite the performance is the fact that the trust is listed outside the UK.
It currently trades in Frankfurt and Zurich but is preparing for a London listing. For this reason the trust is little-known among UK investors, although this is changing.
Investors can currently access the trust through brokers which offer access to foreign-listed stocks.
Tan says the London-listing is appropriate given that 20 to 30 per cent of the shareholder base is in this country including investment heavyweights Newton, Fidelity and L&G.
Tan also highlights that the trust pays a 5 per cent dividend, which differentiates it from the other portfolios in the sector.
The charges are also significantly lower at 1.15 per cent compared to 1.7 per cent for the International Biotechnology Trust and 1.3 per cent for Biotech Growth Trust. The trust has no performance fee, unlike its peers.
He notes that the turnover for the portfolio is significantly lower than its peers and it is more concentrated.
It also has more in European-listed companies including Novo Nordisk, which differentiates it further. European companies make up around 20 per cnet of the fund.
For this reason it is less benchmark-aware, and has managed to significantly outperform its index.
As well as the dividend the trust purchases around 5 per cent of its stock each year in the open market, offering a second route for shareholders to receive a payout.
The top 5 stocks make up 52 per cent of the exposure, with roughly 10 per cent of the fund in each.
The largest holdings are in Celgene, Actelion and Isis Pharmaceuticals, while BB Biotech has 9.7 per cent in Gilead.
The latter was at the centre of the storm in the US biotech sector after a group of Democratic senators questioned the company’s pricing for a new Hepatitis C drug which will cost $300,000 for a course.
However, the drug actually cures the disease, the only treatment to do so, and still works out cheaper than a liver transplant, which is the usual recourse for sufferers.
Tan says that when you analyse the expected revenues from this new drug the value of the company that produces it is far more than the current market price, meaning there is significant value even in a stock which looks expensive.
FE Trustnet looked in more detail at the controversy in a recent article.
Tan says that the correction in the correction in the sector means that it is now at a decent entry point for long-term investors.
Performance of biotech over 7yrs
Source: FE Analytics
“It’s all about the timing,” he said. “I think it was too early before but we have seen a significant correction since.”
