Interactive Investor

Ian Cowie: these two trusts I own are making a difference for the better

Our columnist explains why this investment trust duo’s discounts may present a short-term buying opportunity for long-term investors.

14th September 2023 09:52

by Ian Cowie from interactive investor

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News that vaccines against coronavirus mutations and the flu will begin to be offered to everyone in Britain aged over 65 next week might remind investors that Big Pharma is our best hope of beating a wide variety of bugs. Even if we are bored by Covid, we can't be sure the virus is bored of us.

Fortunately for folk - like me - who know nothing about virology, investment trusts in the Biotechnology and Healthcare sector enable everyone to help fund the fight against many illnesses. But the buzz around beating the global pandemic has worn off and former high-flying investment trusts are now trading an average of nearly 13% below their net asset value (NAV).

Their fall from favour might present a short-term buying opportunity for long-term investors. Better still for those who would rather avoid so-called binary bets - where there is no income today and only the hope of capital growth tomorrow - some of these trusts pay us to be patient with a healthy dividend yield.

For example, International Biotechnology (LSE:IBT) Trust currently offers 4.7% income. This £306 million fund sets out to distribute six-monthly dividends equal to 4% of its NAV on 5 April and is now trading 5.5% below its current NAV.

Nor has this above-average yield harmed total returns. IBT is the top performer in its sector over the past decade, with a total return of 219%; ranks second over five years, with 19%; and third out of seven over the last difficult year with a modestly positive 1.6% return.

If that snapshot fails to set your heart racing then compare and contrast, as the exam papers used to say, with my largest and longest-held investment trust in this sector; Worldwide Healthcare Ord (LSE:WWH). This £2.3 billion fund pays no income and delivered positive returns of 203% and 15% before a loss of minus 7.5% over the same three periods, according to independent statisticians Morningstar.

See what I mean about binary bets? Cash in hand, albeit in the electronic form of a dividend payment, can provide some comfort when everything else goes wrong.

More positively, IBT has recently resolved uncertainty about its future with the board of directors’ decision that the fund’s mandate and existing managers, Ailsa Craig and Marek Poszepczynski, will move to Schroders before the end of this year.

Gavin Trodd, an analyst at the stockbroker Numis, commented: “IBT should benefit from the increased marketing and distribution clout of Schroders.

“The discount has narrowed from about 10% to below 6%, and we believe that it has scope to narrow further, along with an uptick in share buybacks and a positive outlook for the sector given cheap valuations.

“Risk management is at the heart of the approach, seeking to minimise the risk of unrecoverable capital loss in a sector where the binary nature of clinical trials make this an ever present risk. Both science and sentiment are considered to generate an attractive risk-adjusted return.”

Reassuringly, ‘skin in the game’ analysis by the stockbroker Investec shows that three out of five IBT directors have invested substantially more than one year’s fees in the shares of this trust, and another is very nearly there. This way, whatever happens, they should share ordinary investors’ pain or pleasure.

Looking under the bonnet, IBT’s top 10 assets include an allocation of more than 10% to Horizon Therapeutics (NASDAQ:HZNP), where the Federal Trade Commission approved a $27.8 billion takeover earlier this month by the American biotechnology giant Amgen Inc (NASDAQ:AMGN).

Similarly, the oncology specialist Seagen (NASDAQ:SGEN) represents just over 6% of IBT’s money and attracted a $43 billion takeover offer last March from the vaccine giant Pfizer Inc (NYSE:PFE). Both bids suggest Craig and Poszepczynski are fishing in talent pools that other big players find attractive.

Less happily, Mirati Therapeutics Inc (NASDAQ:MRTX), which is also listed in IBT’s top 10 with over 3% of NAV, last month failed to obtain European Union authorisation for its new lung cancer treatment. Such disappointments are unavoidable in this sector, as mentioned earlier.

Even so, shareholders in Syncona (LSE:SYNC), the second-biggest trust in this sector with £1.24 billion assets, may be wondering when their suffering can be cured. Their total return over the last decade is just 16%, followed by losses of 54% over the last five years and 35% over the last year with no dividends to ease the pain.

Worse still, this week began with a £54.5 million hit to “milestone payments” from the Swiss giant Novartis AG Registered Shares (SIX:NOVN), which said it would not be proceeding with a macular degeneration eye treatment it bought from SYNC 18 months ago. Few folk shed many tears when Big Pharma suffers a setback, but the fact remains we rely on this industry to find treatments for many illnesses that used to be incurable.

To return to where we began, the US Food and Drug Administration (FDA) this week authorised Pfizer and BioNTech SE ADR (NASDAQ:BNTX), the first two companies to find a coronavirus vaccine in 2020, to distribute new vaccines to tackle 2023’s Covid mutations.

Big Pharma gets a bad press but it won’t be journalists or politicians who find a cure for serious illnesses. Biotechnology and healthcare investment trusts enable shareholders to ensure our money makes a difference for the better.

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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