Investment Trust Insider: smart stocking boosts Biotech Growth trust

Last summer I had a look at Worldwide Healthcare and recommended it as an alternative to investing in either AstraZeneca or GlaxoSmithKline. The article was written just ahead of the release of the first half 2011 numbers for most of the pharmaceutical sector and those results were not pretty.

Various factors were at work. For Astra and Sanofi the problem was patent expiries; for Glaxo it was downward pricing pressure in Europe and the US; and Novartis cited a problem with competition from generics.

Unsurprisingly, the pharmaceutical sector took a tumble in August 2011, but it then started to recover and, despite some weakness over the past month, it has done OK. An investment in Astra or Glaxo in August 2011 would have made you about 4% in capital terms, but an investment in Worldwide Healthcare would have made you 19%.

This illustrates the benefit of diversifying your exposure to a particular sector by using a dedicated fund advised by a talented management group (Orbimed in this instance).

Stablemate fund outperforms

The point of this article, however, is not to rehash the argument for Worldwide Healthcare but to highlight the performance of Orbimed’s other UK listed fund, Biotech Growth Trust (BIOG) as an investment made in BIOG last August would have made you 65%.

Not that it has always been plain sailing. The fund was launched in June 1997 as Finsbury Emerging Biotech. It had something of a roller coaster ride through the tech boom and by the start of 2005, anyone who had invested at launch was nursing a loss.

After the board brought in Orbimed in May 2005 the performance began to improve but the sector was still out of favour and it was 2008 before the share price really started to climb. Nevertheless, an investment made 10 years ago would have made you five times your money.

BIOG is a decent size, with a market capitalisation of £175 million. It trades on relatively narrow discount, currently 2.5%. The managers target a maximum discount of 6% and use buy-backs when necessary. The focus is on capital growth (most of the underlying companies do not pay dividends so there is no yield).

BIOG is benchmarked against the Nasdaq Biotechnology index, which makes sense because the overwhelming majority of the portfolio is invested in the US. About 40% of the fund is invested in what Orbimed classifies as major cap biotech companies – those with a market cap greater than $3 billion. The balance is invested in emerging biotech companies – those with market caps of less than $3 billion that have had initial public offerings but are usually still unprofitable.