Warren Buffett tells investors to be greedy when others are fearful and take advantage of depressed prices. That in a nutshell is the investment proposition for International Biotechnology Trust (IBT), which sits on an 11% discount to NAV (net asset value).
The discount is not quite as extreme as it was when we highlighted the trust as a rare buying opportunity in March 2020, at the onset of the pandemic, but it nevertheless represents another great opportunity.
This time around prospective investors will also be getting exposure to the biotechnology sector at a time when prices and valuations are depressed.
The NBI (Nasdaq Biotechnology index) languishes 10% below the highs it made in 2021, in stark contrast to the new all-time highs registered by the S&P 500 and Nasdaq Composite indices.
However, there are signs temperament towards the sector is turning more positive as interest rates appear to have peaked.
At the recent annual results (7 November), chair of the trust Kate Cornish-Bowden commented: ‘It is rewarding to report on the green shoots of a recovery in the biotechnology sector following an unprecedented period of share price declines in the sector.
‘Relative valuations are compelling as are the potential rewards for investors in innovative companies.’
IBT has been actively buying its shares and, unusually in the sector, pays a 4% dividend, distributed twice a year from NAV.
In summary, we believe there are many things to like about IBT at the current price. Over time we suspect IBT’s discount to NAV will narrow and the biotechnology sector will recover to new highs, driven by structural tailwinds.
CONSISTENT PERFORMANCE
Seasoned portfolio managers Ailsa Craig and Marek Poszepcynski delivered another year of outperformance for the 12 months to the end of August, with NAV total return increasing 15.9% compared with a 15.3% return for the benchmark.
Over the last three years the trust has produced an annualised return of 3.6% per year, outperforming the NBI’s annualised 0.7% loss.
Demonstrating good risk management and its ‘all-weather’ status, the fund has outperformed in both up and down periods for the biotechnology sector.
This reflects the team’s flexible value-driven approach and ability to adapt to evolving market conditions with a focus on capital preservation and selective risk-taking.
DEREGULATION UNDER TRUMP
Given most of the holdings in the portfolio are US companies, it is worth discussing the ramifications of the recent US election.
Craig and Poszepcynski believe Trump is likely to favour market-friendly appointments at regulatory organisations such as the FDA (Food and Drug Administration) and FTC (Federal Trade Commission).
Those comments were made before the recent (14 November) nomination of vaccine sceptic Robert F Kennedy Jnr as head of the Department of Health and Human Services, which sent biotechnology shares lower.
The managers see potential for accelerated deregulation and an increase in mergers and acquisitions in the sector. They highlight the importance of biotech’s role in public health and scientific advancement.
‘Governments rely on biotech innovation to address pressing healthcare challenges, while the industry benefits from supportive regulatory frameworks and funding, and investors who fund biotech’s drug development efforts benefit from the potential for attractive returns on investment.
‘Innovative drugs which play a role in keeping patients out of hospital, are unlikely to be the target of government intervention as it is hospitals which account for the largest share of US healthcare spending,’ explain the managers.
A DIFFERENTIATED INVESTMENT PROCESS
The managers apply a rigorous bottom-up approach to selecting investments with a focus on attractively-valued companies which have developed innovative treatments for unmet medical needs.
The team looks to identify businesses which command powerful competitive positions, have strong balance sheets and experienced management teams.
A differentiating feature of the investment process is that the team mitigate specific risks around drug trials by reducing exposures ahead of key trial data releases.
Another defensive feature of the strategy is that the portfolio is diversified across companies at different stages of commercialisation as well as different therapeutic areas.
The trust also invests in private companies via two venture capital funds managed by sector specialist SV Health. This proportion of the fund represents around 9% of total assets.
Turning to current positioning, the managers see signs that the IPO (initial public offerings) window is gradually opening, which should result in a prolonged period of positive performance.
Around 39% of the portfolio is invested in early-stage biotechnology companies, 42% in mid-stage revenue-generating but unprofitable companies and the rest in later-stage, profitable businesses.
The managers believe increased investment in ‘carefully’ selected smaller companies should prove beneficial for shareholders, despite increased portfolio volatility.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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