Trust scores by waiting for profits

With more companies bringing new cures to market and a flurry of acquisitions in the sector, the Biotech Growth Trust tops the performance table by investing in emerging companies

FS Beth Brearley 160 byline

Winterflood Investment Trusts’ latest report places the Biotech Growth Trust at the top of the leader board, highlighting the returns available as the biotech sector continues to evolve.

Year-to-date (as at 8 October) the Biotech Growth Trust is at the top of the performance table in both net asset value (capital only) terms and on a share price (total return) basis. The Wins research shows the trust’s share price is up 52.6 per cent, while its NAV has risen 42 per cent.

Data recently released by the AIC shows that over the year to the end of August, the average biotechnology and healthcare investment company was up 26 per cent in share price total return terms, while the wider investment company sector saw an average fall of 2 per cent.

The £410m trust aims to provide capital appreciation by investing in the biotechnology industry. The managers use a bottom-up process and run a portfolio of 40-50 positions. Holdings are predominantly emerging biotechnology companies, typically with a market cap of less than $3 billion, and which have issued an IPO but are not yet profitable.

Geoff Hsu, a partner at OrbiMed Capital, the investment managers of the Biotech Growth Trust, attributes returns to progression within the biotech sector, as companies are increasingly bringing new cures to market.

“Some of these new drugs will be multi-billion dollar earners,” he says. “Furthermore, there has been a flurry of M&A activity over the last three years. Big pharma companies whose drugs are coming off-patent have made acquisitions to supplement their own product pipe-lines. They have fought each other to buy small, successful biotech companies at sometimes vast premiums.”

Also on the podium (on a year-to-date, NAV capital only basis) are the Aberdeen New Thai investment trust (up 37 per cent) and the Aberdeen Asian Smaller Companies investment trust (up 32 per cent).

The £90m Aberdeen New Thai Investment Trust seeks long-term, above average growth by investing in Thailand. Adithep Vanabriksha, the chief investment officer of the trust, says Thailand may be “the quintessential, emerging market”, thanks to its blighted past and subsequent focus on corporate governance. The trust has a fairly hefty exposure to small- and medium-sized companies with an emphasis on the consumer sector; cash and carry operator Siam Makro (6 per cent) and retailer Big C Supercenter (4 per cent) are top 10 holdings.

The £328m Aberdeen Asian Smaller Companies Investment Trust aims to maximise long-term total returns by investing in companies with a market cap of less than $1 billion in Asia ex Japan and Australasia. The fund’s largest geographical weighting is Malaysia (21 per cent), with holdings including retailer Aeon Co (M) Berhad, insurance provider LPI Capital and plantation company United Plantations Berhad.

Lagging the leader board (on a year- to-date, NAV capital only basis) with double digit losses are: Invista European Real Estate, Baker Steel Resources and Tamar European. However despite seeing a decline of 18.4 per cent, Wins highlights Baker Steel Resources as “an interesting value play”.

The £68m commodities trust, which targets companies where there is a discount between the private value and the expected IPO price, recently announced that one of its largest holdings, Ivanplats, is set to issue an IPO.

The Wins report says: “This will be the fund’s first successful IPO and, assuming that the final price is within this range [C$4.50-C$5.50], it will produce a significant uplift on the fund’s current holding price of US$3.50 (C$3.42). At the lower end of the IPO price range this would feed through to an uplift of 9 per cent to the fund’s NAV and an uplift of 17 per cent at the top end of the price range.”

Meanwhile Wins has made one change to its recommendation list, replacing Jupiter European Opportunities with the largest of the European investment trusts, the £513m Fidelity European Values Investment Trust, on the grounds the former is trading at fair value.

“We continue to rate the manager of Jupiter European Opportunities, Alexander Darwall, highly,” the note says. “However, following a strong period of outperformance we note that this fund now trades around NAV, while the European sector average discount is near to 9 per cent…We have selected Fidelity European Values to add to our recommendation list as we believe that this fund offers greater value on an 11 per cent discount.”

Since picking up the portfolio at the start of 2011, Fidelity European Value’s manager Sam Morse has returned a 5 per cent increase on NAV while the benchmark FTSE World Europe ex-UK index has fallen 2 per cent, the research states.