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Investment Trust Watch: biotech boom throws up 'bargains'

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Investment Trust Watch: biotech boom throws up 'bargains'

Biotechnology investment trusts are beginning to look cheap as their share prices struggle to keep up with an explosive rally in the sector.

Biotech stocks have enjoyed a rip-roaring week amid reports US president Donald Trump's efforts to tackle drug pricing will be much less punitive than feared.

Investment trusts focused on the sector have seen their net asset values (NAV) jump over the past five days. Numis data shows Biotech Growth (BIOG) was the best NAV performer over the last week, up 9.8%, while BB Biotech (BION.S) close behind, up 8.1%, and International Biotechnology's (IBT) NAV rising 7.1%.

But shares in all three of the trusts have struggled to keep pace with those NAV rises, leading to wider discounts. Both International Biotechnology and Biotech Growth are now trading on double digit discounts, of 10.9% and 10.1% respectively. Five days ago their discounts stood at 6.6% and 7.6%.

With shares in Biotech Growth having traded at an average 6.3% discount over the last 12 months, its double-digit deficit has placed it in the list of 'cheap' investment trusts compiled by Numis Securities, on a Z-score of -2.2.

To recap, a Z-score is a measure used by analysts to determine whether an investment trust is trading significantly beyond its one-year range. As a rough rule of thumb, a Z-score of -2 or more is regarded as inexpensive, while a score of 2 and above is viewed as ‘dear’.

'Cheap' trusts Share price premium (-discount) to NAV % 12-month average premium (-discount) % Z-score
SQN Asset Finance Income C (SQNX) 2.1 6.7 -2.9
Ashmore Global Opportunities - £ (AGOL) -29.2 -22.6 -2.8
BlackRock Income & Growth (BRIG) -4.4 -2.2 -2.6
Ranger Direct Lending (RDL) -25.3 -12.9 -2.2
Third Point Offshore Investors - £ (TPOG) -19.8 -16.3 -2.2
NB Distressed Debt - Extended Life (NBDX) -11.0 -7.2 -2.2
-10.1 -6.3 -2.2
Woodford Patient Capital (WPCT) -9.2 -3.4 -2.1
Ashmore Global Opportunities - US$ (AGOU) -38.7 -29.6 -2.1
Lindsell Train IT (LTI) 12.1 44.0 -2.1
Impact Healthcare REIT (IHR) 1.8 5.7 -2.1
Investment Company (INV) -11.7 -4.7 -1.9
SQN Asset Finance Income (SQN) 6.5 12.7 -1.9
Juridica Investments (JIL) -52.9 -26.3 -1.9
Damille Investments II (DIL2) -28.5 -15.9 -1.8

Source: Numis Securities 21/6/17

Whether that counts as a bargain or not depends on the current bullishness towards biotech stocks persisting. Their latest lift has come from reports Trump's plans for the sector won't match up to his rhetoric on drug pricing, including his claim just days before his inauguration that pharmaceutical companies were 'getting away with murder'.

The New York Times, which has seen a copy of a draft executive order, said the plan 'appears to give the pharmaceutical industry much of what it has asked for - and no guarantee that costs to consumers will drop'.

That has led some to see a brighter outlook for biotech, a sector that has been clouded by US political risk since the start of the presidential campaign two years ago.

Biotech took a big hit in September 2015, when Democrat presidential candidate Hillary Clinton tweeted her outrage at 'price gouging', after Turing Pharmaceuticals hiked the price of a drug called Daraprim from $13.50 to $750.

And while Trump's shock election as president sparked an immediate relief rally, it didn't last long, as the president elect proceeded to take pot shots of his own against the sector.

Two years in the doldrums have taken the shine off what had been a stellar rally for biotech: the Nasdaq Biotechnology index had risen around 140% in dollar terms in the three years to the summer of 2015.

But there are now signs of that bullishness returning. Rudi Van den Eynde, head of thematic global equity at Candriam Investors Group, said Trump's draft order was 'in line with the Republican philosopy of reducing regulation and government interference'.

'Is this the green light for biotechnology? The pricing discussion will obviously continue but this draft, if confirmed, surely goes a long way towards giving the "all clear" signal,' he said.

Another mention must also go to Lindsell Train (), a regular feature this year as its huge premium, which has stood as high as 76% over the last 12 months, has continued to fall.

Now at 12.1%, the premium is the lowest it has been at any point over the last year, with chairman Julian Cazalet warning in the trust's latest annual report that its shares in fund management group Lindsell Train, the holding that has powered the big premium, could be vulnerable in a market downturn.

Lindsell Train's NAV performance so far this year has actually been among the best in the global sector, up 22.4%. But the shares have fallen by nearly the same amount as the discount has unwound, meaning the trust has now been dislodged by Scottish Mortgage (SMT) as the best performing in the sector over five years.

'Expensive' trusts Share price premium (-discount) to NAV % 12-month average premium (-discount) % Z-score
LXB Retail Properties (LXB) -2.8 -28.5 3.3
Electra Private Equity (ELTA) -11.9 -62.8 3.0
Phoenix Spree Deutschland (PSDL) 30.4 12.7 2.9
LMS Capital (LMS) -26.8 -37.2 2.8
JPMorgan Global Convertibles Income (JGCI) -1.5 -7.4 2.5
Fair Oaks Income (FAIR) 10.8 2.3 2.5
Honeycomb IT (HONY) 15.7 4.5 2.4
P2P Global Investment (P2P) -9.3 -18.3 2.4
GCP Asset Backed Income C (GABC) 6.0 4.2 2.4
Kennedy Wilson Europe Real Estate (KWE) -6.1 -16.8 2.4
CATCo Reinsurance Opportunities Fund (CAT) 5.1 -1.3 2.2
TwentyFour Income (TFIF) 6.0 2.7 2.2
Fidelity European Values (FEV) -7.3 -12.2 2.2
Prospect Japan (PJF) 4.8 -19.9 2.2
HBM Healthcare Investments (HBMN) -19.4 -26.5 2.2

Source: Numis Securities 21/6/17

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