The Nasdaq Biotechnology sector saw a sharp selloff earlier this year, plunging 21.37 per cent from the end of February to mid-April. The index has since bounced back and is up 10.31 per cent since the start of the year.
Year-to-date performance of index
Source: FE Analytics
Tan, investment companies analyst at Cantor Fitzgerald, says the biotechnology sector is a good bet to outperform the wider market and its current wide discount is a “sweetener”.
“This is something that is proprietary technology – it’s intellectual property. It has high margins and barriers to entry. It takes years to develop a life-saving drug and once you do, you get patent protection for it,” he said.
Numis’s Cade says it’s always tough to call the direction of this niche and often volatile sector, but he thinks it is definitely a good prospect over the long-term – especially when investors can buy it on the cheap.
“It’s an interesting sector and it’s got a lot of pharma companies,” he said. “On a long-term basis it looks attractive, but you need to understand what you’re buying.”
Anyone hoping to access the sector can use the International Biotechnology Trust, which is trading on a discount of 17.35 per cent, or the Biotech Growth Trust, on a discount of 5.26 per cent. Both trusts are currently on wider discounts relative to their one- and three-year histories and have delivered strong returns over the long-term.
The Biotech Growth Trust has been the clear winner over the last five years, however, returning 310.07 per cent. The International Biotechnology Trust made 172.51 per cent compared with 257.99 per cent from the Nasdaq Biotechnology index.
Performance of trusts vs index over 5yrs
Source: FE Analytics
However, Tan prefers the Swiss-domiciled BB Biotech Trust, which is trading on a massive discount to NAV of 22 per cent.
“We don’t think it deserves to be on such a large discount. It’s down to a couple of things,” he said. “It’s much larger so there’s more liquidity. It’s got a healthy distribution policy, aiming to return 10 per cent to shareholders every year. It’s a more concentrated portfolio, and you can debate whether that’s a good thing, but if you want outperformance you’ve got to take a view.”
Tan says anyone who is thinking of buying something as diverse as the International Biotech Trust “might as well buy the Nasdaq Biotechnology index”.
Analysts at Cantor Fitzgerald previously tipped the little-known trust as a good buy following a fall in tech stocks earlier this year. It was trading on a massive discount to NAV, which made it attractive for value-hunting investors.
According to Tan, the BB Biotech trust is one of the largest and most established trusts in the biotech space and draws attention to its solid track record since 1993. It has a distribution policy which returns around 5 per cent of its share price in cash at every year end and a further 5 per cent via share buybacks over the course of each year.
However, its returns of 153.2 per cent over the past five years mean it has lagged behind the Nasdaq index.
Performance of trust vs index over 5yrs
Source: FE Analytics
“BB Biotech has indeed lagged on a five-year view, but we think that is to some extent explained by the managers’ ‘quality bias’, which one might reasonably expect to underperform a strongly rising, sentiment-driven market,” Tan said.
“I would add that, yes, of course, no market goes up in a straight line, and there will be the inevitable market correction, but the managers believe that their approach should result in greater NAV stability and superior returns over time, which I think the longer term track record illustrates.”
A major bonus point for the trust, Tan says, is that it doesn’t charge a performance fee, unlike its peers.
“We really think these guys are trying to do the right thing. Where it gets highlighted is the performance fee. There isn’t one,” he said.
BB Biotech has ongoing charges of 1.15 per cent. Biotech growth charges 1.22 per cent (2.09 per cent with its performance fee) while International Biotech charges 1.7 per cent, including a performance fee.
Dallas Webb, portfolio manager on the £1.4bn trust, says the team runs a highly concentrated portfolio of 20 to 35 stocks which they hold for a minimum of four years because, he says, they’re not afraid to stick to their convictions.
Some of the portfolio’s largest holdings – US biotech firm Celgene, Swiss biotech company Actelion and US firm Gilead, which develops single tablet treatments for various diseases, most notably hepatitis C – have been in the fund for “well north” of a decade, Webb says.
“We’re not afraid to put our money where our conviction is,” he said. “We don’t want to dilute across a portfolio of 100 stocks. We’re looking for true innovation, companies that are bringing something new to the market, not something slightly better.”
“We want stocks with the potential to at least double within a four-year period,” he added.
Webb says the team starts with a 2 to 3 per cent position when it buys a new holding and gradually moves up by buying more or allowing the stock to grow.
“We never jump in at 10 per cent. We might buy in at 5 per cent, but that’s extremely rare. We’d have to have a lot of conviction in the company,” he said.
Webb also thinks now is a good time to buy into the sector after the “bloodbath” of February’s selloff.
“In February the sector was at an all-time high. The correction was a nice opportunity for people to participate,” he said. “We’ll still see volatility going forward, but not to the same degree. There’s plenty of room for the market to expand.”
He particularly likes companies in the mid cap space that benefit from both strong growth and acquisitions by larger firms.
“We’ve had a mid cap focus since 2011,” he said. “We saw a lot of opportunities in the mid cap space and it has paid off. Mid caps still have a chance to keep going. They got hit the worst in the correction – some of them halved. It was tough. It was a bloodbath in the US watching these mid caps get ripped.”
The trust is run by a team of biotechnology specialists. Webb himself is a microbiologist, while other members of the team are neurologists and biochemists, so they have an in-depth knowledge of the sector.
The US does dominate the portfolio, not because there aren’t good biotech companies in other parts of the world, according to Webb, but because the opportunity set is much greater and the sector is more mature in the world’s largest economy. A total of 77 per cent of the trust is invested in US companies.
“The US is clearly the leader in terms of biotech and innovation now,” Webb said.
