Profile: International Biotech trust sheds unquoted holdings

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Biotech has been booming, with the Nasdaq Biotechnology index rising more than 304 per cent in the past five years, and the past year alone seeing a 23.8 per cent increase.

This means times are good for the managers of the International Biotechnology Trust. Carl Harald Janson and Ailsa Craig, the co-managers of the trust are seeing lots of opportunities in the market.

The great performance of the market has tipped many to predict the sector is in bubble-like territory, but Janson thinks we’re a long way from this.

“Price to earning valuations are between 10 and 25, they are not in the 40s or 50s,” he says. “Another factor is M&A. Companies are still paying a premium above where the stockmarket is priced for good assets, which also helps the market longer term.”

But the duo do not see the future as being smooth sailing. Instead, they think the potential news of US interest rate rises by the Federal Reserve could lead to a short-term dip for the markets, which they are preparing for.

“I think in time when the interest rate move happens we are going to see an increase in turbulence in the stockmarket for the next six months,” says Janson. In particular this is likely to affect the smaller biotech companies that do not yet have products in the market – that Janson thinks are already quite expensive and an area he is trying to avoid.

The duo are also avoiding too many of the “US hyped names” in the trust. The US and Canada are still the dominant geography for the fund, with 84 per cent invested there, but Craig says one of the key allocation decisions in recent months has been to increase the number of European stocks in the portfolio.

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Another change has been dialling down the non-listed investment portion of the portfolio.

The £263m IBT previously had a decent exposure to the unquoted market in its portfolio, largely because the trust is run by SV Life Sciences, a venture capital manager. The unquoted portion was around 35 per cent of the portfolio in 2007. However, the managers have now decreased this gradually over time and the board took a decision earlier this year to halt new unquoted investments for the time-being to harvest the investments the fund holds. Unquoted investments now stand at 7 per cent of the portfolio.

The thinking behind this is that the public markets have performed so well and provided a large chunk of returns for the portfolio, says Craig. But also, the unquoted sector has seen a large number of exits in recent years.

The knock-on effect to this is that the management fees on the fund were cut earlier this year, from 1.15 per cent of the NAV to 0.9 per cent. The board decided that with the more capital intensive unquoted portion of the portfolio being cut, so too should the management costs, to make them more competitive with peers.

A key focus for the managers is reducing the volatility of the fund, by trading around any announcements on drug trials or research. Ahead of any research results announcement the duo sell out of the relevant stock, buying it back afterwards if they think the stock still merits it – this is the case for good or bad results.

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“There is hype pre-data, that is baked into share prices, so we have to think about the risk-adjusted investment. It’s very difficult to play the game and be a winner, the market is always smarter than you are,” says Janson.

“There is human psychology in play in markets. The swings are bigger than reality. Going into data announcements expectations can be overdone, so we can benefit from that. We try not to be very emotional.”