Interactive Investor

Trust Awards 2014: Large Trust

14th July 2014 10:13

Fiona Hamilton from interactive investor

Winner: Biotech Growth Trust

This is our most prestigious award, as it pitches substantial trusts from the different sectors against each other. It is also the only award open to sector specialists.

Thanks to its impressive net asset value (NAV) returns in each of the past three years, and to the issue of new shares (at a premium to NAV), Biotech Growth Trust was eligible for inclusion for the first time this year. It claimed the award with the best three-year NAV returns of all our award winners.

This was despite a 10% setback in March 2014, when a US congressman's complaint about the high price of a new cure for Hepatitis C led to a sell-off across the biotech sector. The sector and trust both suffered further falls in April, but stabilised in May.

Managed by New York-based OrbiMed Advisors, which claims to be the world's leading independent healthcare investment specialist, BIOG has outperformed the Nasdaq Biotechnology index in four of the past five years.

Managers Richard Klemm and Geoffrey Huw seek to identify the most innovative and promising biotechnology companies, and are supported by over 60 highly qualified analysts from a mix of scientific and business backgrounds.

The trust used to focus predominantly on companies capitalised at less than $3 billion (£1.8 billion), but last year gained shareholder permission to include a higher weighting in larger companies. This was in recognition of the evolution of the biotechnology industry; it therefore gives the trust more flexibility.

Huw says its portfolio falls into three categories: large profitable biotechnology companies, which are launching new products and are attractively valued; emerging biotechnology companies, with newly launched products or products in the late stage of development; and early stage biotechnology companies with a significant asset in development, which is expected to have a positive data read out over the next few months.

Nearly 90% of the portfolio is US quoted, because that is where the biotechnology industry is most vibrant. However, Orbimed has several overseas offices, and the team keeps a watch for opportunities in Asia and Europe.

Huw says the outlook is promising for the key drivers in the biotech sector: the development of new drugs, and mergers and acquisitions. Exciting therapeutic advances are expected this year in the treatment of cancer, hepatitis C and cardiovascular problems.

US drug approvals have been coming through much more promptly than before. And "big pharma" continues to rely on buying a lot of its research from the biotech sector.

Highly Commended: Aberforth Geared Income Trust

Smaller companies in most regions have enjoyed a golden run over the past three years, and UK smaller companies have been no exception. The Numis Smaller Companies (ex investment trusts) index gained 64.6% over the period, which was more than twice the gain in the FTSE All-Share index - itself one of the strongest regional indices.

Half the 14 trusts in the UK smaller companies sector outperformed the Numis index, with five of them large enough to qualify for inclusion in this award; all were close to the top of the performance table. Henderson Smaller Companies, which won last year, came fourth. Aberforth Smaller Companies Trust came fifth.

However, in a rising market neither could match the highly geared ordinary shares of Aberforth Geared Income Trust. It is managed by the same five-man team as ASL, but is committed to paying a higher dividend and achieving income as well as capital growth. It has many of the same holdings as its sister trust, but is more concentrated and has less bias to very small companies.

The average price/earnings ratios on the portfolios of both AGIT and ASL are well below that of their Numis benchmark. It is hoped this will help them to make continued progress at a time when many highly valued smaller growth companies are struggling to justify their ratings.

The managers are fairly optimistic about the outlook, but those attracted by the near 4% yield must remember that AGIT's high gearing can work both ways, enhancing any upturn but exacerbating setbacks.

Highly commended: Worldwide Healthcare

Like Biotech Growth Trust, the winner of this category, Worldwide Healthcare is managed by OrbiMed. However, it is more diversified in all respects, so it's arguably better suited to more cautious investors.

Whereas a mix of large, emerging and speciality biotechnology companies account for most of BIOG's portfolio, with the balance in life sciences tools, they account for less than half of WWH's investments.

The rest is split between "big pharma", headed by Roche, and otherwise mostly US-based companies such as Merck, plus a growing band of medical technology and healthcare services and distributors.

The former includes ground-breaking companies such as Illumina, which is a leader in instruments used in genetic sequencing, and Intuitive Surgical, which specialises in robot-assisted surgery.

To ensure diversification, more than 60% of WWH's portfolio is normally in companies capitalised at more than $5 billion (£2.9 billion) and at least 20% in smaller companies. Gearing has tended to be in double figures.

WWH endured a difficult run a decade ago, when many of its holdings drifted to very low valuations. Biotechnology companies have led the revival, as research has finally started to pay off.

Pharmaceutical companies have begun to attract more investors as new managers have tackled their inefficiencies and refilled their pipelines through takeovers and mergers. The Pfizer bid for AstraZeneca has added to the excitement.

Both pharmaceutical and biotechnology companies should be able to capitalise on the growing worldwide demand for improved healthcare, particularly from ageing populations. They should also benefit from the "Obamacare" law, which has extended healthcare insurance to millions of Americans, and from a less onerous drug approval regime in the US.