Merricks, investment director at Skerritts Wealth Management, says that every decade has a “growth story”. He says that the 2000s had emerging markets, the 1990s had technology and 1980s had Japan, the 2010s will be categorised by breakthroughs in the biotechnology sector.
Because of that, he has a large proportion of his ISA in the Biotech Growth IT as he sees it as the best way to gain exposure to the booming industry. “The one I still like the best, and the one that I regularly top up, is the Biotech Growth Trust,” Merricks said.
“I think that biotech is the growth story of the decade and the trust is still trading on a 5 per cent discount. It has been performing well and, for me, it is the best way for an investor to get into biotech.”
The Biotech Growth Trust is managed by Orbimed Capital’s Geoffrey C. Hsu and Richard D. Klemn.
The fund has a very good long term track record as, according to FE Analytics, it has returned 448.93 per cent over 10 years.
However, it has performed particularly well in the period after the financial crash given its returns of 316.74 per cent over five years, which is close to 75 percentage points more than the returns of its benchmark, the NASDAQ Biotech Cap index.
Performance of trust versus sector and index over 5yrs
Source: FE Analytics
Despite that, its performance, relative to the index, has dropped of more recently. While it has returned more than 37 per cent over 12 months, its benchmark has returned 46 per cent.
However, one of the contributory factors to that underperformance has been a widening discount.
The closed-ended fund is currently trading on a 5.72 per cent discount to its NAV, but the trust had traded at a 3 per cent premium over the last 12 months. The board has also indicated to shareholders that they will try to control the discount if it were to widen out past 6 per cent.
Merricks says that even though the sector has been very profitable over recent years, investors should have no fears about buying now.
“There have been lots of advances in medicine recently and with different diseases like cancer and diabetes, there is allsorts going on. However, I want a well-managed portfolio of stocks which is run by people who know far more about the sector than I do. ”
“Every decade has its story and I am convinced that this time around it is biotech. Yes, it has had a good few years, but I think it still has a long way to go considering the amount of research and development that is going on,” Merricks said.
Given that the closed-ended fund is trading on wider discount than it has done over one and three years, Merricks says that now is a great opportunity to build up a position in the Biotech Growth Trust.
“The whole sector has changed,”Merricks said. “The last time it was really in favour was 12 or 14 years ago during the tech bubble.”
“It takes so long for drugs to come to the market, but huge numbers are now coming through. If you have a good management team, like with the Biotech Growth Trust as they are absolute specialists in what they do, then you have a good chance of seeing very good returns.”
He also says that innovative biotech companies will be some of the major beneficiaries of cash-rich large pharmaceutical businesses, such as the likes of GlaxoSmithKline, Pfizer and Novartis.
He says large pharmas are looking to spend more on capex and M&A instead of organic growth and Merricks is confident in Hsu and Klemn’s abilities to find the most innovative biotech firms that could be on their radar.
Merricks isn’t alone in backing the biotech and pharmaceutical industries.
FE Alpha Manager Jan Luthman recently told FE Trustnet that the innovation of the pharma industry was one of his biggest long term themes. FE Alpha Manager John Bennett, who heads up various European funds at Henderson, is also bullish on the two sectors. http://www.trustnet.com/News/396108/luthman-the-hidden-growth-story-of-the-next-decade/1/1/
“Personally, I believe that the pharmaceutical industry is on the verge of a technological revolution,” Bennett said.
“The pharmaceutical industry goes through deep cycles. People see it as a defensive and boring, but that can all change when there is a scientific breakthrough. The problem is that the last blockbuster breakthrough was Viagra.”
“However, companies now have products in the pipeline that will help to cure Cancer, Diabetes and Alzheimer’s. In fact, there were 39 FDA approvals last year which is the most there have been in one year since the 1990s,” he added.
While adding to its risk characteristics, Merricks likes the fact that the £355m Biotech Growth Trust is a concentrated portfolio of just 41 holdings.
Our data shows that 87.7 per cent of the closed-ended fund’s assets are invested in US-listed companies. The rest of the portfolio is spread across Continental Europe, the Far East and the UK, though the managers also hold a very small proportion of the trust in unquoted businesses.
The Biotech Growth Trust has gearing of 9 per cent and has a total expense ratio (TER) of 1.2 per cent.