Interactive Investor

Ian Cowie: an investment trust I intend to own forever

19th May 2022 09:25

by Ian Cowie from interactive investor

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Our columnist owns two trusts in a sector that is out of form. He explains why he is buying and holding for the long term, pointing out that now is an opportunity to ‘buy low’.

Ian Cowie 600

What would you say is the best news humanity has had in the last couple of difficult - if not downright dismal - years?

Let me give you a clue: investors can buy into the sector that brought you this life-saving good news - and play our part in helping to fund similar breakthroughs in future - via investment trusts that are currently trading at substantial discounts to their net asset value (NAV).

This long-term investor believes that some of these trusts are priced in the bargain basement and I hold two of them, including one in my top 10 assets by value.

Yes, you guessed, I am talking about the discovery of an effective vaccine against the coronavirus less than a year after the blasted bug had closed down the global economy. To be precise, Pfizer (NYSE:PFE) and BioNTech (NASDAQ:BNTX) announced that they had a 90% effective jab against Covid on 9 November 2020, just eight months after Britain went into lockdown.

Memories are short, so it may be worth recalling that share prices around the world had been in free fall for most of 2020 and many foolish commentators had recommended selling out of the market. I was one of the few to point out, repeatedly, that the only certainty this provided was to turn paper losses into real ones; so I hung on to what I had and continued to buy at bargain prices.

On the day before what became known as ‘Pfizer Day’ I said in my column in The Sunday Times: “I believe humanity will win the war against the coronavirus. I don’t know when or how many casualties there will be before that, but I suspect investors who surrender now will regret doing so.”

Needless to say, global share prices soared when the good news arrived from Pfizer, less than 24 hours later. Here and now, I remain optimistic and a happy shareholder in PFE, Worldwide Healthcare (LSE:WWH) - both top 10 assets in my ‘forever fund’ - and, somewhat less happily or heavily invested, International Biotechnology (LSE:IBT).

More importantly for investors considering gaining some exposure here, trusts in the Association of Investment Companies (AIC) ‘Biotechnology & Healthcare’ sector look unfairly undervalued and may offer good value for long-term investors. They have fallen out of favour because most of them pay low or no dividends and have been hit by the backlash against ‘jam tomorrow’ stocks, caused by recent and ongoing increases in inflation and interest rates.

Looking forward, the fundamental argument for investing in this sector is that the global population is tending to become older and wealthier - and richer wrinklies tend to spend more on healthcare. The pandemic panic and subsequent variations of Covid both boosted investment in biotechnology. New drugs cost a fortune to develop and investors in this sector help to pay for it.

Now consider the top-performing trust in this sector over the last year. Polar Capital Global Healthcare (LSE:PCGH) delivered total returns of 19% in the last 12 months, compared to sector average shrinkage of -17%, but its shares continue to trade 9.2% below their NAV.

PCGH came second over five years, with 54% returns, and delivered 224% uplift over the last decade, so there is nothing wrong with its long-term performance. Its top 10 assets are led by Johnson & Johnson (NYSE:JNJ) - the biggest pharmaceutical company in  the world - followed by other blue chips, including AstraZeneca (LSE:AZN), Sanofi (EURONEXT:SAN) and Boston Scientific (NYSE:BSX).

Meanwhile, Bellevue Healthcare (LSE:BBH) ranks first in this AIC sector over the last five years with total returns of 56% but, over the last year it shrank by -12%. It is exceptional in this sector by trading at a premium to NAV; albeit less than 1%. Launched in December 2016, it lacks decade-long performance.

The trust’s fund manager – Paul Major – was interviewed by interactive investor earlier this year – check out the links below.

That is not a problem for Worldwide Healthcare Trust, which is the top performer in this sector over the last decade with total returns of 343%, followed by 34% over five years and shrinkage of 15% over the last year. I have been a WWH shareholder for more than a decade, which is why it remains in my top 10 by value. Despite its recent poor performance, I intend to hold this trust forever and most recently topped up, buying WWH at £29.95 in January; they traded at £31 this week and are priced 6% below NAV.

Less happily, International Biotechnology is a more recent holding where I bought shares at £6.53 in April 2020, that traded at £6.10 this week. It ranks second in its sector over the last decade, with a total return of 308%, but that is rather academic for me. Meanwhile, its five and one-year numbers are somewhat sickly at 27% and -12%, with the shares priced at an 8% discount to NAV.

More positively, IBT pays 5.3% dividend income and is the top yielder among the trusts mentioned in this article. PCGH pays less than 0.7%; BBH yields 4.25% and WWH pays just over 0.7%. Most recently, IBT announced earlier this month that one of its top holdings, Biohaven (NYSE:BHVN), has agreed to be bought by Pfizer for a 74% premium to its price before the deal. BHVN represented more than 5% of IBT’s assets at that time.

This suggests that I am not the only one who thinks there are bargains to be found in an unfashionable and underpriced sector. That must be good news for long-term investors.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in International Biotechnology Trust (IBT), Pfizer (PFE) and Worldwide Healthcare (WWH) as part of a globally diversified portfolio of investment trusts and other shares.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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