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Income, growth, diversification: A compelling combination

August 2020

Categories: DIY Magazine

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by International Biotechnology Trust. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

This trust offers a blend of characteristics which might appeal to many investors...   

Not many investors would turn down capital growth, a stable yield, and diversification from one of the most exciting sectors in the marketplace. This is exactly what International Biotechnology Trust (IBT) and its Fund Manager, SV Health Managers LLP have provided for the trust’s investors and why it is attracting a new and growing investor base.

IBT’s lead manager Carl Harald Janson aims to give investors in IBT exposure to the growth generated by companies in the biotechnology sector, as well as any outperformance the investment team can achieve with active management. Part of that growth is then paid to investors in the form of a dividend yield equivalent to 4% of its year-end NAV, the dividend being paid from capital reserves and split over two semi-annual tranches.



A yield of a different kind

Yield is increasingly hard to come by anywhere right now, and the search for it has driven many investors and fund managers into the same few companies in the market. UK equity income funds, for example, reportedly hold large overlapping positions in a handful of FTSE 100 dividend-payers, leading to a concentration of risk for income seeking investors.

IBT offers a differentiated income stream which is generated by converting some of the growth generated by its investments in global biotech companies into a dividend paid from the capital reserve.

In the current uncertain environment, many companies have been cutting or suspending their dividend payouts to preserve cash. Because IBT’s yield is paid out of its capital reserves rather than dividends from the companies it holds this means it is not reliant on dividends paid by the companies in which it invests; as long as they are growing at a sufficient rate, some of that growth can be harvested and paid out as income.

Investors should be aware that IBT’s dividend is based on its NAV which can fluctuate based on portfolio performance. Since its dividend policy was introduced in 2016, the trust has attracted more and more income-hungry investors and this, combined with strong performance, sector momentum and consistent fund management policy, has seen its discount to NAV turn to a premium.

There are several powerful drivers in the biotech space which should continue to support the trust’s healthy yield.

Among them are the supply and demand dynamics underpinning the sector.

On the supply side, the biotech industry is home to cutting-edge innovation in new drugs and treatments such as gene therapy or antibodies to tackle disease. The US Food and Drug Administration (FDA) is approving more new drugs than ever before, creating a supportive environment for drug development.

Then on the demand side are demographic and social trends, such as a growing elderly population globally and increased spending power in developing markets leading to an increasing need for healthcare.

As countries around the world become wealthier, spending on healthcare as a proportion of GDP rises, and this should continue to be a tailwind for biotechnology investors.

A vaccine for COVID

COVID-19 is already having a huge impact on the sector in many ways. There are over 10 clinical trials for vaccines and treatments happening across the whole industry as scientists scramble to create a vaccine in record time – perhaps even by the end of this year, where normally it takes five to ten years to produce one.

That said, COVID-19 has also caused issues for biotech, as it has for many other industries. Recruitment to clinical trials has slowed, some clinical trials have had to be halted, and international supply chains have faltered.

Visits to doctors and hospitals for non-essential treatments have fallen dramatically. However, IBT targets companies which develop drugs for unmet medical need which are less affected by this.

Strategies to temper risk

While COVID-19 research has led to sky-high valuations among some biotech companies, IBT’s investment team avoids chasing these names, as it is hard to predict at the moment which technologies will be successful and to what extent treatments or vaccines will be profitable.

Following a bull run for biotech between 2012 and 2015, valuations became stretched and investors feared the sector was entering bubble territory. Five years of consolidation followed, and valuations now don’t look excessive, the managers say, at around 12 times estimated earnings for the S&P Biotechnology Industry Index.

Volatility is something investors in biotech should expect, as it is a characteristic of the space, but IBT’s managers have strategies in place to mitigate it and smooth performance.

Chief among these is diversification, with a broad portfolio of over 90 companies straddling different sub-sectors, different size brackets and different stages of development.

This includes IBT’s investment in a venture capital fund holding unquoted biotech companies which, along with a few direct unquoted investments which accounts for 5-15% of the fund and is uncorrelated to the wider market.

The team also tries to reduce stock-specific risk by reducing or selling out of companies ahead of big binary events such as crucial drug trials. This helps them avoid big losses associated with failed trials but means they can buy back in when trials succeed and the asset is de-risked, and still catch some upside from the share price.

This approach has reduced volatility and supported long-term outperformance for International Biotechnology Trust.



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