IT Biotechnology & Healthcare’s returns of 476.74 per cent over 10 years are among the highest in the closed-ended universe and the growth drivers behind these gains look set to pick up pace over the long term.
Best-performing IT sectors over 10yrs
Source: FE Analytics
Data from the Kaiser Family Foundation shows over-55s make up 29 per cent of the US population but account for 55 per cent of healthcare spend and figures from the United Nations predict the number of over-65s worldwide will grow from 12.5 per cent today to 22 per cent by 2050.
Source: United Nations, World Population Prospects: the 2017 Revision
Yet with assets of just £4.7bn, the entire IT Biotechnology & Healthcare sector is less than half the size of the Standard Life Global Absolute Return Strategies (GARS) fund and less than a third of the size of M&G Optimal Income
.
It is a different story in the US, however, where 81 per cent of the sector’s assets are invested; for example, the Nasdaq Biotechnology index has a market cap of approximately $1trn.
So why are UK investors happy to leave the outstanding growth potential from this area of the market to their counterparts on the other side of the Atlantic?
Ailsa Craig (pictured), manager of the International Biotechnology Trust, said there is a perception that investors in the UK are somehow different from those in the US – for example she pointed to a cliché that “Brits are good at inventing things and Americans are good at producing them”. However, she believes the real explanation is not so simple.
“I think there are lots of compounding factors,” the manager said.
“It might be because the industry is located there [in the US]. You get university hubs generating new ideas, then you get new companies surrounding those hubs, venture companies at the start and then the bigger companies move in and they generate even more ideas.
“A lot of these companies share the same office building and I think that’s what compounds it.”
Craig contrasted this with the situation in the UK, where many biotech start-ups tend to get acquired before they have a chance to take off.
“The last growth healthcare name in the UK, Shire, has gone, although it wasn’t really growth when Takeda bought it in the end,” she added.
“And now all UK investors have are AstraZeneca and Glaxo as the major pharma names.”
Another possible explanation is the level of risk involved with this area of the market, with many UK investors remaining wary after having their fingers burnt in the past.
One high-profile example in the late 1990s saw British Biotech’s market cap soar to £1.9bn on hopes for its cancer drug Marimastat. However, the drug didn’t work and the company was eventually merged with Vernalis in a deal that valued the new business at less than £100m.
“[Biotech] doesn’t have a brilliant reputation in the UK, although I think that’s changing now because ultimately the people who remember that are retiring at this sort of stage,” Craig added. “And hopefully the younger blood will come in.”
“You still get high-profile blow-ups in UK biotech. We had Circassia recently, which was a Woodford company. Without naming names there are many, many stocks that have blown up in the past, some on AIM, some on the main London list and investors are shying away for that reason.”
To help mitigate this risk, Craig and Dr Carl Harald Janson, the lead manager of International Biotechnology Trust, take a different approach to their peers. Rather than trying to second-guess binary events such as clinical trials, they will begin to trim their position in a company ahead of a major announcement in a bid to avoid a potential double-digit price fall if the results disappoint.
Lucy Costa Duarte, head of investor relations on the trust, said this strategy works because the market is inherently optimistic.
“We ride the optimistic price rise, sell out, leave maybe a bit on the table until the data comes out and then we are not in a position of holding a falling knife and looking for a hasty exit if the news is bad,” she explained.
“And if it is good, we can buy it back pretty quickly and even if we lose a little bit, on a risk-weighted valuation basis it’s actually probably cheaper.”
Craig added: “News-flow is a big part of the daily grind of our job. This industry does have these events pretty consistently, so the trick is staying on top of them.
“There are approximately 1,000 companies and each of them has maybe two or three major events every 12 months, so you’ve got to know not only what the risk-reward is but what the perception is of the risk-reward and then when that is happening.
“Then you make a call on whether that is priced in or not.”
International Biotechnology has made 510.39 per cent over the past decade, compared with gains of 476.74 per cent from its sector and 455.08 per cent from the Nasdaq Biotechnology index.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
The trust is trading at a slight premium of 0.19 per cent compared with one- and three-year average discounts of 1.95 and 5.95 per cent.
It has ongoing charges of 1.4 per cent and is yielding 4.44 per cent. It is not currently geared.