After a year of procrastination, I’ve finally taken the plunge and bought into the biotech and healthcare sector.
Along with technology and consumer discretionary, healthcare has been one of the best-performing sectors of the last 10 years. The last decade has seen returns of 14.2% a year in US dollar terms for healthcare versus 10.6% for world markets.
And since the start of 1995, MSCI reckons the sector has returned 11.1% a year whereas global markets produced 7.5%.
My purchase is essentially a bet that this long-term trend of outperformance will continue.
The reasons are pretty simple. The world is getting older and wealthier. As both these things occur, the proportion of expenditure that goes on healthcare tends to rise.
The healthcare sector
I covered the sector make-up in this article a year ago but it’s worth a quick recap.
The MSCI World Healthcare index, a widely used benchmark for healthcare trusts, consists of:
- Pharmaceuticals: 41%
- Equipment and supplies: 22%
- Providers and services: 16%
- Biotech: 15%
- Life sciences tools and services: 6%
There’s a wide range of companies here from racy biotech outfits to more staid healthcare providers and pharmacy chains.
The MSCI index covers 153 companies in developed markets ranging in size from $1bn to $370bn. The largest are Johnson & Johnson, United Health, and Roche.
Two-thirds of the industry is US-listed. The UK (largely AstraZeneca and GlaxoSmithKline) accounts for 4%.
The NASDAQ biotechnology index is another popular benchmark. Its returned 12.4% a year since January 1993 and 19.7% over the last 10 years. Amgen, Vertex, and Gilead are the largest constituents and it has just over 200 members.
The biotech index has had by far the rockier ride. It rose fivefold in just two years from 1998 to 2000 and then took 13 years to make a fresh all-time high.
In other words, patience is the name of the game here.
There are 7 biotech and healthcare investment trusts listed on the UK market and I split them into 3 groups.
- Whole sector: Worldwide Healthcare (WWH), BB Healthcare (BBH), and Polar Capital Global Healthcare (PCGH)
- Biotech specialists: International Biotechnology (IBT) and Biotech Growth (BIOG)
- Biotech “venture capital”: Syncona (SYNC) and RTW Ventures (RTW)
Healthcare investment is often seen as a specialist area so most of the management teams running these trusts, and the companies they work for, concentrate on just this sector.
Polar Capital seems to be the exception, although healthcare is its second-largest strategy accounting for £2.5bn out of £15bn of its assets under management.
Show me some numbers
All the trusts in this sector have performed very well over the last decade, although performance over the last five years has been more in line with global markets.
That’s mirrored by both the MSCI World Healthcare and Nasdaq Biotech indices, which fell during the second half of 2015 and for most of 2016. Concerns over US regulatory changes seemed to be the main reason, with a little global economic uncertainty/Brexit concern sprinkled on top.
MSCI reckons the healthcare sector is on a historic profit multiple of 24.3 and a forward multiple of 17.9.
Global markets as a whole trade at roughly 20 times profits (both on a historic and prospective basis), so healthcare doesn’t seem overly expensive right now.
I’d take those figures with a hefty dose a salt, though, as there is considerable uncertainty over what profits will be for 2020!
Here are some summary stats for the seven trusts as of late July:
|Polar Capital Global Healthcare||2010||£340m||196%||11.3%||11.6%|
There are some sizeable trusts here – two are well over the £1bn mark.
The three oldest trusts all did in excess of 20% a year over the last decade, in excess of both the main biotech and healthcare benchmarks.
Who runs these trusts?
Worldwide Healthcare and Biotech Growth have the same management behind them: OrbiMed.
OrbiMed has run the former since it listed in 1995 but Biotech Growth was run by Reabourne up until 2005 when its focus was primarily on Europe. Its former names include Reabourne Merlin Life Sciences, Finsbury Life Sciences, and Finsbury Emerging Biotechnology.
International Biotechnology has been run by SV Health Managers (formerly known as Schroder Ventures Life Sciences) since 2000. Prior to that, it was run by Rothschild Asset Management.
BB Healthcare is run by Bellevue, which also runs a well-known £3bn+ Swiss biotech trust, BB Biotech, that was set up in 1993.
Syncona is self-managed and was formerly the Battle Against Cancer Investment Trust. It changed its name at the end of 2016 after buying a portfolio of investments from Welcome Trust (who now own 28% of Syncona’s shares) and Cancer Research UK.
Syncona and RTW both take a more concentrated approach to their investments, typically buying into unquoted companies.
Syncona often holds a substantial proportion of the companies it invests in (50%+). It has over 60% in cash having sold two of its largest investments fairly recently.
RTW only joined the London market last year and still has 20% of its portfolio in cash and 35% in what it calls ‘temporary public investments’. It is run by New York-based RTW Investments, which has around $3bn of healthcare assets under management.
I’ve been here before
Worldwide Healthcare’s long-term performance is particularly impressive but it’s also pretty distressing for me to look at.
I had a position in this company in the late 1990s for a few years, when it was known as Finsbury Worldwide Pharmaceutical. For reasons I no longer recall, I sold out for 195p in 1999. It’s around £35 today.
What’s more, it has paid out over £2 in dividends, more than I sold it for, just to make my mistake even more excruciating.
It’s probably my worst-ever sell decision. You’ll need to give me a moment to wipe the tears off my keyboard!
Discounts and premiums
The trusts that invest mostly in listed companies (WWH, IBT, BIOG, and BBH) have recently swung between a small premium and small discount.
The Polar Capital trust trades at a discount of 10%, presumably due to the fact its performance has tended to lag the others, although it did command a premium in its early days.
PCGH also has some zero dividend preference shares, representing around 10% of its total market value.
Syncona usually trades at a premium, as some of its investments might soon become listed companies and command a much higher valuation. It’s on a premium of 30% at the moment but has been as high as 50%. Note that its net asset value typically only gets fully updated every six months.
RTW trades at a premium of around 10% and seems to update its net asset value on a monthly basis.
As it’s considered a specialist sector, none of these trusts has low charges.
Apart from BB Healthcare, they all charge a performance fee.
RTW and Syncona are the most expensive, with ongoing charges of 2% and 1.8% respectively.
Worldwide Healthcare is the cheapest at 0.9%, due to its larger size.
The rest are around 1.1% to 1.2% (plus any performance fee that becomes due).
Whittling down the options
Although I have been looking to invest in this sector again for a while now, I don’t think I have any special insight into which trust is likely to do the best over the long term.
So my process here was initially more focused on what I didn’t want to buy, then sifting through what was left to see if it passed muster.
Both RTW and Syncoma, interesting though they look, are a little too far up the risk ladder for my purposes, so I didn’t consider buying them as a way of getting exposure to the sector. There’s a good piece on the Adventurous Investor website that looks at them in more detail for those that are interested.
The Polar Capital trust seems to be the poor relation. Its ZDP shares seem like an unnecessary complication although I have owned other trusts with this structure before. Its performance over the last 3-5 years on a relative basis hasn’t been too bad, but I don’t see any obvious reason to pick it ahead of anything else.
So we’re down to four pretty quickly.
Biotech Growth has been on an absolute tear recently, up nearly 80% since October 2019. But that followed four years where it significantly lagged behind the sector.
As the more volatile, smaller, and specialised of the two OrbiMed funds, I’m going to skip it for now in favour of its more diversified bigger brother.
What I bought
That leaves me with Worldwide Healthcare, BB Healthcare, and International Biotechnology. I’ve invested a total of 5% of my portfolio in these three, split roughly three ways.
The first two trusts have a wider healthcare focus so I was happy enough including one biotech specialist in the mix.
It does feel a little odd to be a shareholder of Worldwide again, not to mention paying over 17 times what I sold it for all those years ago. I think it’s the only investment trust that I have sold outright and then bought back into.
International Biotechnology has been on my watchlist since I saw its team present at Mello last year. It takes quite an active approach, often choosing not to hold investments when big test results are released, where the downside of a failure can outweigh the upside from a success.
BB Healthcare is the trust I’m the least familiar with. It is by the far the youngest of the three, but the BB Biotech trust it’s related to seems to have an excellent pedigree. BB Healthcare has done well since it first listed nearly 4 years ago, with further share issues more than tripling its share count from 150m to 467m.
BB Healthcare is looking to run a concentrated portfolio, with 30-35 quoted positions in companies that have the potential to shake up the industry. The strategy is to hold the best ideas from an investable universe about 800 companies, selected for their 3-5 year return potential.
IBT is “focused on companies aiming to develop breakthrough treatments for conditions that affect millions of people, including cancer, rare diseases, infectious diseases, and cardiovascular disease”.
Worldwide Healthcare has been described as a ‘best ideas’ fund for OrbiMed. It accounts for about a fifth of the firm’s total assets under management.
Both Worldwide Healthcare and International Biotechnology have around 70 positions. They also have a little in unquoted companies (12% in case of IBT but less than 1% for Worldwide).
All three trusts have fairly significant top 10 weightings, with Worldwide’s top 10 accounting for 40% of its net asset value, IBT 47%, and BB Healthcare 55%.
International Biotechnology and BB Healthcare both pay dividends as a set percentage of their year-end net asset value (4% and 3.5% respectively). The former adopted this practice in 2017 but the Swiss-listed BB Biotech has been paying 5% of its share price out this way since 2012, apparently without any ill effects.
This type of dividend policy isn’t to everyone’s taste, but I’m happy with a limited number of my holdings using it. It certainly seems to be in vogue at the moment, with numerous trusts seeing their discounts narrow after adopting it.
Worldwide Healthcare’s dividend is less than 1%. The payout level has moved significantly higher over time, but does jump around a bit year from year, seemingly reflecting exchange rate movements as well the underlying yield from its portfolio.
What I sold
I’ve owned both of these for a few years but become less keen on them recently. I bought them before I started this blog when my note-keeping on the whys and wherefores of investment decisions wasn’t as detailed.
Princess was bought when HGCapital, a long-time holding of mine in the private equity sector, became an uncomfortably large part of my portfolio.
HG has, no doubt purely to spite me, done much better since I made that decision.
On a net asset value basis, the performance gap isn’t nearly as large, but HG has moved to a premium while Princess has seen its discount widen quite a lot. Princess had to cut its dividend this year, in case some of its investments required additional funding. That surprised me a little, as I thought it had more flexibility on that front.
In truth, I probably rushed into this purchase a bit. Looking at others in the sector in more detail since, such as Pantheon and BMO, Princess seems a little lacklustre by comparison.
It grates to sell at a discount of over 20% but I think the long-term prospects for biotech/healthcare seem more attractive than sticking put.
I’ve reduced my position in Murray International by about a third.
I still like the fact it offers a different spin from most other global trusts but of the three “cautious global” funds I own, Caledonia and RIT being the others, it was the one I probably have the least conviction in.
All three have struggled in 2020, after having lagged during the 2010s due to lower US weightings, leading me to the conclusion I had a little too much invested in them collectively.
Both RIT and Caledonia may also be trimmed at some point, but Murray was cut back first.
I’ll probably do articles on all three of these new trusts in the coming months but my plan is to add a little bit more over time as I become more familiar with their foibles.
I’m regarding these investments very much as a learning exercise and it could well be that I drop one of them in favour of something else in the sector at a later date.
Healthcare has had a very good run in the last year, so my timing here may leave a lot to be desired, too.
The upcoming US presidential election could cause a wobble, as candidates often seem to harangue drug companies for excessive prices as a vote-winning exercise.
Both Worldwide and BB Healthcare are holding higher than usual cash positions (or are less geared) at the moment, reflecting the fact they are cautious on valuations.
As I’m intending to invest in this sector for a couple of decades, I’m not going to get too cute about waiting for a better entry point. I’m generally of the view that my market timing skills when it comes to things like this varies from appalling to absolutely shocking.
I’m definitely not seeing this as a COVID play. I’m hoping that’s a short-term factor for this industry and there seems to be a lot of hype around smaller companies working on cures for this disease. And it seems that many of the drugs that do prove successful may be provided at cost.
Perhaps the main reason for why now is deciding that I had something I actually wanted to sell, in order to free up some funds. This time last year, I was broadly happy with pretty much everything I owned, but 2020 has exposed a few cracks.
Overall, this leaves my portfolio a bit more aggressively positioned than before. But with just a 5% switch, I see as a tweak of the wheel rather than a course change.
Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page. Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!
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