Anyone in doubt about the revitalising effect dividends can have on an investment trust’s share price need only look at International Biotechnology Trust (IBT).
Managers of the £223 million closed-end fund hope it may soon be able to issue shares for the first time in over a decade. That’s because of the apparently enthusiastic response to its proposal last September to start paying shareholders a 4% dividend from capital.
Dividends and biotech funds aren’t natural bedfellows because biotech companies rarely distribute income to shareholders, preferring to reinvest the cash into research and new drugs.
In that context the arrival of an 11.5p per share dividend in January to be followed by an identical payment at the end of this month looks to have impressed investors, even if there are doubters who question the wisdom of creating an income stream where none naturally exists.
Since then the discount – or gap between IBT’s share price and its underlying net asset value (NAV) – has shrunk dramatically, from 16% to under 4%, a clear sign of renewed investor demand.
Another indication of a broadening shareholder base has been the sight of value investor Lazard reducing its holding from 26% to under 18% as it sells into a 12-month rally.
Share issue eyed
IBT’s discount hasn’t been this narrow since early 2007 when the investment trust raised £36 million in a ‘C’ (conversion) share issue to take advantage of investor appetite following a strong period of performance.
Ailsa Craig, one of three investment managers on the fund, believes a similar opportunity could arise in the future. ‘I see no reason why we shouldn’t be able to issue more shares,’ she told Investment Trust Insider recently.
If issued at a price above NAV, another share issue would be good for investors, increasing liquidity in the stock and cutting the proportion they pay in charges.
Should IBT pull off a new share issue it would be quite an achievement for an investment trust that, having issued nearly 25 million shares 10 years ago, subsequently spent much of the time since then buying them back in again!
Unfortunately for IBT – and everyone else – its 2007 fund raising was followed by the 2008 financial crisis. Strange though it may seem now, biotechnology didn’t do too badly during the credit crunch.
Morningstar data shows IBT’s shares fell 11.7% in 2007 and 9.4% in 2008, which was painful but nothing like the 30% falls many equity funds in developed markets suffered before the great bank bailouts signalled a powerful rebound.
Nevertheless, IBT’s discount ballooned to 24% as cautious investors gave high-risk areas like biotechnology a wide berth. Thus began a period of intermittent buybacks as the board sought to reduce excess supply of stock and lower its discount to the 8% level shareholders were promised at the C-share issue.
Good, but not amazing
The result has been that whilst performance since then looks extraordinary – a 328.5% total shareholder return makes the FTSE All-Share’s post-crisis gain of 86% look dismal – the number of IBT shares in issue has nearly halved to 37.5 million.
The apparent disparity is not as odd as it might look. On the one hand, buying back shares at a discount would have contributed a little bit to those stunning shareholder returns. On the other hand, the fact the shares often traded more than 10% below net asset value reflects the fact that IBT was actually the weakest of the four biotech investment companies over the period.
In the past decade Swiss-listed BB Biotech (BION.S) has shot the lights out with a 765% total return, while the Orbimed-managed Biotech Growth (BIOG) and Worldwide Healthcare (WWH) trusts have delivered blockbuster returns of 662% and 506%. IBT was the only one not to beat the Nasdaq Biotechnology index return of 538%.
To be fair, virtually all of the biotechnology trusts have stood at discounts at various points in recent years. Also, IBT’s ranking has improved since the arrival in 2013 of lead fund manager Carl Harald Janson, former manager of the top-performing Carnegie Biotechnology Fund.
Over three years IBT, which invests more in unquoted and smaller biotech companies than some of its rivals, has returned nearly 120% to shareholders, ranking it second out of six funds in its sector, having achieved slightly more than double the gain in its Nasdaq benchmark.
So is the decision to pay a dividend the reason why IBT has rerated? It’s certainly a factor but so is the realisation by investors that the political winds that have buffeted the sector in the past two years are passing. Before his inauguration US president Donald Trump accused drugs companies of ‘getting away with murder’ over the pricing of their treatments but has gone on to recently issue an executive order that many believe could have been drafted by one of big pharma’s lobbyists.
Of course the downside of a politically immobile Trump may be no tax cuts and therefore no repatriation of the piles of corporate cash that have been stashed offshore. That could have triggered a fresh wave of consolidation in a drugs industry that has thrived on mergers and acquisition in the past.
Nevertheless, the disappearance of politics from healthcare is a huge positive if, as Janson believes, it refocuses investors on the long-term fundamental attractions of the sector. Biotech companies have become increasingly innovative in producing new drugs for the rapidly ageing populations in many countries around the world, he says. Until recently, that growth could be bought cheaply as big biotech companies in particular traded below the US stock market.
With the Trump effect waning, all biotech trusts have seen their shares trade much closer to NAV, with the exception of Syncona (SYNC), which has spiked to a 26% premium since its emergence from the Battle Against Cancer trust at the end of last year.
Income vs growth
Besides, dividends are becoming more common in biotech trusts. BB Biotech has paid out capital for many years and its London-listed stable mate BB Healthcare (BBH) also launched last year with a semi-annual distribution policy.
But it’s not one-way traffic. Polar Capital Global Healthcare (PCGH) has also seen its share price move close to par after shifting from its previous income approach to a growth-based strategy.
Perhaps it’s not dividends but a clear investment proposition and decent prospects that investors appreciate.