The FTSE All Share, by contrast, returned -30 per cent, while FTSE investment companies returned -35 per cent.
The strong performance of pharma and biotech stocks has been reflected by closed-end investment trusts. Trustnet data shows that to 26 January over one month out of 54 AIC sectors biotechnology & life sciences, which only comprises three trusts, is ranked seven with an 8.4 per cent total return. Over three months it is seven with 16.9 per cent, over six months it is five with 12.8 per cent, and over one year five with 13.6 per cent.
WINS data, meanwhile, show that the three trusts in this sector were in the in top ten best performers out of all UK investment trusts over 2008 in terms of NAV return: Biotech Growth Trust was ranked six and returned 18.4 per cent; Finsbury Worldwide Pharma was eight with 15.8 per cent and International Biotechnology was ten with 9.8 per cent.
In terms of share price performance, Finsbury Worldwide Pharma was second with a 13.7 per cent total return and Biotech Growth Trust was third with 12.7 per cent. International Biotechnology was 16 with -9.4 per cent.
Closed-end biotech funds are likely to do well again this year, even though the underlying industry faces some headwinds. WINS says of biotech trusts: “They have produced very good results over the long term, and we continue to rate them highly.”
Meanwhile Collins Stewart includes pharma and biotech as one of five investment trust sectors in which to be overweight, while among its six core recommendations from all investment trust sectors it includes Finsbury Worldwide. Collins Stewart's reasons include the likelihood that the defensive nature of the earnings profile of the healthcare sector will continue to command a premium.
Certainly biotechnology & life sciences also has a good longer-term record with Trustnet data showing that over three years to 26 January it was ranked seven with 7.7 per cent and over five years ten with 40.5 per cent.
In terms of the underlying stocks in this sector David Pinniger, investment manager of the International Biotechnology Trust, is concerned about a lack of capital for research and development, while risk appetite is at record lows. However this is most likely to be a problem for small caps which should lead to consolidation among stocks in this sector - which he feels will be beneficial in the long term.
Small caps have already experienced problems. For example, in 2008 the large cap US NBI Index (Nasdaq Biotech Index) made a total return of -12.3 per cent, while US small cap biotech index R2GBIOR (Russell 2000 Growth Biotech Index) returned -30.94 per cent, according to Bloomberg data.
Large cap biotechnology stocks are more defensive and offer strong revenue and growth streams, as well as being more liquid according to Pinniger. As a result the International Biotechnology Trust, which has traditionally focused on small caps and unquoted stocks, shifted its focus at the beginning of 2008 to include larger more defensive stocks, so that the portfolio is now split 50/50 between large and small caps.
Pinniger said: “We see a good number of interesting small companies but they are in a difficult financial position and we do not want problems. We make sure our investments have enough cash.”
But he feels that biotech investment trusts will still be able to do well against other AIC sectors because larger caps offer good revenue and earnings while the sector will benefit from mergers and acquisitions activity.
An example of this was the announcement on Monday that US pharmaceutical company Pfizer is to takeover rival Wyeth in a $68bn deal, which is expected to be the first of many. Meanwhile FTSE 100 company GlaxoSmithKline commented earlier this month that it will look to make bolt-on alliances and takeovers to sustain drug development.
In addition to this, City bookmaker BetsForTraders today reported that 78 per cent of its customers betting on AstraZeneca are betting the share price will rise – an indication they expect strong results when the company reports its full year results on Thursday.
Daniel Lockyear, fund of funds manager at Iimia is of a similar opinion to Pinniger.
He said while he is concerned about biotech small caps due to their reliance on credits they will also be prime targets for acquisition activity. Acquirers are likely to pay over the current share price for these stocks which should make what he describes as some “decent capital gains.”
However in terms of funds Lockyear prefers a vehicle which includes healthcare as well as biotech stocks, on the grounds that this area has many attractive qualities. Large cap stocks in this area are also trading cheaply at present, and offer growth as well as being defensive.
Lockyear cites Finsbury Worldwide Pharma which invests both in biotech and healthcare stocks. But as a value buy he favours International Biotechnology Trust due to its large discount to net asset value (NAV) compared to its peers.
He said while this trust includes riskier unquoted companies it does not merit a discount this wide, so an investor could benefit both from biotechnology exposure and a rise in the share price.
International Biotechnology is on a 19 per cent discount, compared to 6.5 per cent for Biotech Growth and 6.7 per cent for Finsbury Worldwide. International Biotechnology’s historic average is 14.3 per cent, while the other two trusts are marginally tighter than their averages.
| International Biotech Trust portfolio breakdown | % |
| Celgene Corp | 5.8 |
| Micromet | 5.5 |
| Gilead Sciences | 5.2 |
| OSI Pharmaceuticals | 3.4 |
| Qiagen NV | 3.3 |
| Shire | 3.3 |
| Celera | 3.0 |
| CSL | 3.0 |
| Biomarin Pharmaceutical | 2.9 |
| Avvymax | 2.8 |
Source: Trustnet.com