Ian Cowie: soaring sector that’s still going cheap

How do you fancy doing well by doing good by investing in a sector which has soared 29% higher in six months but remains priced nearly 14% below its net asset value (NAV)?

Regular readers may have guessed this long-term shareholder in the self-descriptive Worldwide Healthcare (LSE:WWH) Trust is talking about seven investment trusts in the ‘Biotechnology & Healthcare’ sector.

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One of those, Polar Capital Global Healthcare (LSE:PCGH), was interviewed in interactive investor’s latest podcast episode, which focused on long-term trends, including ageing populations and innovation by companies responding to medical needs.

Most seek capital growth by funding research into innovative medicines to treat a wide range of serious illnesses. Perhaps surprisingly, the top performer over the last year, International Biotechnology (LSE:IBT), also delivers a decent income of 3.2% which has increased by an annual average of just over 5% during the last five years. But IBT shares continue to trade 11% below their NAV.

The explanation is that healthcare has had a hard time of it until recently. This includes criticism about Covid vaccines from many people, including the American president Donald Trump, and political pressure to cut the cost of prescription drugs.

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To be specific, last week Trump succeeded in forcing the biggest pharmaceutical company in the world, Eli Lilly (NYSE:LLY), and its Danish rival, Novo Nordisk (XETRA:NOV), to slash the price of their weight-loss wonder-drugs by nearly two thirds.

At the same time, the growing realisation that obesity is linked to a wide range of illnesses - including Alzheimer’s disease and several forms of cancer - has sparked a bidding war to buy small biotechnology businesses which might produce the next pharmaceutical blockbuster. Pfizer (NYSE:PFE), the which was first to gain authorisation for a Covid jab, said last week that it had beaten Novo Nordisk to buy the weight-loss specialist start-up Metsera (NASDAQ:MTSR) for $10 billion (£7.6 billion).

The latter company, Metsera, was founded just three years ago and has only 100 employees. But it appears to have a promising pipeline of experimental drugs, including a weight-loss pill based on a chemical, amylin, that might be longer-lasting than the semaglutide used by LLY and NOVO; marketed variously as Mounjaro, Ozempic and Wegovy.

The increased offer from PFE, which will be subject to a vote by its shareholders today (13 November), has given a shot in the arm to the ‘Biotechnology & Healthcare’ sector. Several investment trusts which were suffering a post-Covid comedown have seen share prices spike.

As mentioned above, IBT leads over the last year with a total return of 28%, following 32% over five years and 153% over the last decade, according to independent statisticians at Morningstar. Yearly charges for this £312 million fund are on the high side at 1.2%. But investors attracted to the prospect of capital gains in future, plus decent dividends now, may consider that Schroders’ fund managers, Ailsa Craig and Marek Poszepczynski, both appointed in 2021, earn their fees.

When I asked about their MTSR exposure, they told me: “At the time Pfizer’s initial deal was announced, IBT held more than 1% of its NAV in Metsera, benefiting from the significant premium of the acquisition.

“As we often do following M&A deals for portfolio companies, we then sold our position, reallocating capital to other companies that represent potential takeover targets for pharmaceutical companies. The bidding war we have subsequently seen is rare, but points to the strong demand for innovative businesses in the rapidly evolving obesity space.”

Polar Capital Global Healthcare ranks second in the sector over the medium and long-term, with total returns of only 6.2% over the last difficult year, following 74% over five years and 162% over the decade. Charges for this £494 million fund are much lower at 0.88% but so is the yield, at 0.6%, and the discount to NAV of only 2%.

While none of IBT’s underlying holdings could be described as a household name, PCGH’s top asset is Eli Lilly, followed by AstraZeneca (LSE:AZN) and Abbott Laboratories (NYSE:ABT).

Closer to my wallet, sad to say, both the above funds beat WWH over the medium and long-term, although its recent revival puts it ahead of PCGH over the last year. I have been a shareholder in WWH for more than a decade, transferring from paper-based brokers in 2013 when it was priced at the equivalent of £1.35, allowing for a subsequent 10 for one stock split. The shares were trading at £3.75 on Thursday.

Total returns from WWH’s £1.6 billion fund over the usual three performance periods were 9.7%, 6.8% and 125%. The fund managers still have some way to go before performance proves they can match returns delivered by an earlier manager, who left toward the beginning of the last decade.

Here and now, WWH has the lowest charges of the three funds discussed here, at 0.8%, with a yield of 0.65% and trading on a 7.3% discount below NAV. Its top 10 underlying assets include Eli Lilly and AstraZeneca with the robotic surgery company, Intuitive Surgical (NASDAQ:ISRG), also featuring. So I intend to hang on in the hope of more healthy returns in future.

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

Ian Cowie is a shareholder in Eli Lilly (LLY), Novo-Nordisk (NOVO), Pfizer (PFE) and Worldwide Healthcare (WWH) as part of a globally diversified portfolio of investment trusts and other shares.