Interactive Investor

Ian Cowie: I’ve discovered a trust for both income and growth

1st October 2020 13:53

Ian Cowie from interactive investor


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This trust is beating our columnist’s long-term favourite in the sector, and pays us to be patient, too.

Doing the double with decent dividends and good capital growth is the ultimate goal for this DIY investor, who aims to pay for retirement with income and gains from a portfolio of investment trusts and other shares. Easy to describe but difficult to deliver, because so many high-yielders turn out to be value traps where the price of a high income today is a low total return tomorrow.

Now a relative tiddler in the Association of Investment Companies (AIC) Biotechnology & Healthcare sector has scored twice for me, with a 3.1% yield and a 22% capital gain. It's early days yet, because I only bought shares in International Biotechnology Trust (LSE:IBT) in April this year, as reported here on 7 May, but this £304 million fund shows how the coronavirus crisis is creating winners as well as losers.

Most surprisingly, IBT is beating my long-term favourite in this sector, Worldwide Healthcare Trust (LSE:WWH), in terms of both income and gains. I have held shares in WWH for more than a decade, during which time it has usually been a top performer and remains one of my 10 most valuable holdings. However, WWH yields a negligible 0.7% income and achieved relatively modest gains of 9% during the last six months.

Over more meaningful periods, total returns from IBT - run by SV Health Managers - and WWH - managed by Frostrow Capital - are similar. The latter leads this sector with 118% over the last five years, compared to 103% from the former trust, according to independent statisticians Morningstar via the AIC. Their positions are reversed over the last decade, when IBT delivered a total return of 604% compared to 490% from WWH.

No wonder IBT’s shares trade in line with their net asset value (NAV) while WWH offers a modest 1.2% discount to NAV. Both trusts are beneficiaries of the pandemic panic because the companies in which they invest are receiving increased attention in the search for a cure for the coronavirus.

This is boosting acquisition and merger activity across the Biotechnology & Healthcare sector. For example, September saw the American bio-tech company, Gilead Sciences (NASDAQ:GILD), announce a $21 billion (£16.4 billion) takeover of the cancer specialist Immunomedics (NASDAQ:IMMU).

Fortunately for IBT shareholders, both those companies are among this investment trust's top holdings. Immunomedics is IBT's second-biggest stake, accounting for 5.6% of its assets, while Gilead ranks third with 5.3% of the total, while its biggest holding is Horizon Therapeutics (NASDAQ:HZNP) at 7.7%.

By contrast, WWH’s top three holdings are more familiar blue-chip names; Bristol-Myers Squibb (NYSE:BMY), Merck (NYSE:MRK) and Alexion Pharmaceuticals (NASDAQ:ALXN). No doubt these will continue to prove long-term beneficiaries of rising demand for healthcare from an ageing population but, in the short-term, IBT’s more specialised focus on biotech is paying off.

Contrary to what you might expect, there is little duplication of assets across the underlying portfolios of IBT and WWH. The only top 10 constituent of both is Horizon Therapeutics, which has performed well recently.

IBT’s lead fund manager, Carl Harald Janson, who is also a medical doctor, explained: “The main positive contributors to net asset value (NAV) in August were Horizon Therapeutics, Myokardia (NASDAQ:MYOK) and Genmab (NASDAQ:GMAB). Horizon reported that sales of their newly launched drug, Tepezza, exceeded already high consensus expectations and raised full year guidance.”

Similarly, WWH’s lead fund manager, Sven Borho, pointed out: “The speciality pharmaceutical company, Horizon Therapeutics, posted a blow-out quarter led by the newly launched product, Tepezza or teprotumumab, the only marketed drug treatment for thyroid eye disease.”

Against all that, the American presidential election on 3 November, is causing concern that pharmaceutical prices and profits could come under unwelcome pressure. Nobody loves “Big Pharma” and populists find this industry an easy target for claptrap about price-gouging.

However, it won’t be politicians who find a cure for the coronavirus - or any of the other serious diseases for which biotechnology and healthcare companies seek new treatments. So I continue to believe this is a sector where investors willing to risk capital loss can do well by doing good.

Better still, some investment trusts - such as IBT - can pay us to be patient. Dividends are often overlooked and undervalued by investors seeking to shoot the lights out with capital growth, but income remains important for those of us hoping our stock-market portfolio will provide us with a pension.

Ian Cowie holds shares in International Biotechnology and Worldwide Healthcare investment trusts as part of a globally diversified portfolio.

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

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.

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