This trust ticks all the boxes.
Investing in biotech isn't easy. Ask David Brennan, the outgoing CEO of AstraZeneca (LSE: AZN), who lost his job because the pharmaceutical giant has been too slow replacing its drug pipeline.
If it's difficult for industry insiders, it's nigh-on impossible for the layman. I, for one, am totally bamboozled by talk of ologies and therapies.
But it's a racy sector -- at least in the US -- where high risk goes hand-in-hand with high returns. There are some similarities with mineral exploration, as independent biotech companies prospect for new drugs, burning cash and time in the hope of finding the new blockbuster. There are rich rewards for success.
The sector outlook is positive. Valuations are at historical lows, while the drug majors face challenges replenishing their pipelines of new patented drugs. It's getting harder to discover new drugs and therapies, but that increases the value for those who are ultimately successful.
That sets the scene for a rise in M&A activity. It's no coincidence that AZN has recently agreed to buy US biotech Ardea (NASDAQ: RDEA.US) or that GlaxoSmithKline (LSE: GSK) had a tilt at Human Genome Sciences (NASDAQ: HGSI.US).
Underpinning the wider industry are the demographic forces of population growth, ageing Western populations and rising affluence in the emerging nations.
Thankfully, there's an easy way to invest in the sector, and one that's been remarkably rewarding. In such a specialist area, there is no substitute for relying on expert stock pickers. That means using investment trusts or funds.
The Biotech Growth Trust (LSE: BIOG) is the purest play on biotech among the four trusts on the LSE, and it's also been the stand-out performer.
|Share price change||Share price||Three-month change||One-year change||Three-year change||Five-year change|
|Biotech Growth Trust||251.5p||15.2%||43.9%||106.1%||116.8%|
|International Biotech Trust||184p||5.1%||19.9%||63.6%||12.4%|
|Polar Capital Global Healthcare||116.5p||6.4%||10.9%||n/a||n/a|
|Worldwide Healthcare Trust||781p||3.3%||10.1%||49.5%||54.2%|
These are impressive performance figures. The Biotech Trust has beaten its peers hands down, and its performance is top notch compared to the many open-ended healthcare funds on the market, too.
Notably, the share price reversed just 3.6% in 2007 and increased 12.7% in 2008, when the FTSE 100 was being trashed. It is benchmarked against the NASDAQ Biotech Index, which it has comfortably outperformed over one, three and five years.
The trust is managed by OrbiMed Capital, which has offices in New York, San Francisco, Shanghai, Mumbai and Tel Aviv. It has 40 professionals, many with medical backgrounds.
Its strategy is to invest in emerging biotech companies, with the aim of achieving capital appreciation. It focuses on companies with a market cap of under $3bn that have undergone an IPO but remain unprofitable. There seems to be a sizeable universe of such companies in the US.
By anticipating the outcome of clinical trials, the manager aims to be one step ahead of the market's valuation. So far, its track record has been remarkable.
To manage risk and stabilise the fund, around a third of the portfolio is held in big pharma companies. Judging from the changing portfolio, which typically has 40-50 holdings, there is considerable turnover.
The total expense ratio was 1.25% in the year to March 2011: pretty cheap when you consider the specialist input that you're getting. You can pay close to that for an equity income fund that simply permutates the FTSE. The total annual management fee is around 1% and there's a performance fee of 16.5% of benchmark outperformance.
There is a policy to manage the share price discount to within 6% of NAV, by share buybacks. Currently, the discount is 2%, which is a little on the low side. It seems to generally trade within a band of 5-10%.
There are no dividends. This is purely a capital play.
OrbiMed also manages the Worldwide Healthcare Trust (LSE: WWH), which has a wider remit to invest in healthcare, including pharma and medical devices and services as well as the racier biotech. It also has an impressive track record and is definitely worth a closer look if you prefer a broader healthcare play.
International Biotech Trust (LSE: IBT) invests in a mixture of listed and unlisted companies. It is managed by SV Life Sciences, which was spun out of Schroders (LSE: SDR). Its performance hasn't been so impressive and the TER is over 2%.
Polar Capital Global Healthcare Growth and Income (LSE: PCGH) is a newer fixed life fund, whose unwieldy name perhaps reveals an unwieldy strategy. It aims to generate income from around 80% of its assets, yielding 3%, with around 30 companies in a growth portfolio.
I had wanted to review the Biotech Trust to see if its recent run justified some top slicing and portfolio rebalancing. But having looked at it again, I think I'll run with my winning position.
The discount is a little tight at present, but I'd definitely recommend it for a watch list. The manager has proved its ability to deliver strong returns over a period that has seen volatility in most assets.
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> Tony has shares in the Biotech Growth Trust, AstraZeneca and GlaxoSmithKline, but no other companies mentioned in this article.