Foreword
By Annabel Brodie-Smith
Well, after perhaps a too good Christmas break…it’s back to work for me. After the excesses and indulgences of last month I’m aiming to have a healthier January and so is Compass. We’re looking at the investment companies investing in biotech and healthcare.
Our investment expert, Ian Cowie explains “despite sickly returns from many shares in 2018” this sector performed well, delivering a positive return of 7.7% versus a 3.4% loss for the average investment company. Ian analyses his biotech investment companies and has a new addition to his portfolio. Considering the defensive nature of these companies he writes they “could be just what the doctor ordered to calm nerves and deliver healthy returns in future.”
The managers of Polar Capital Global Healthcare, Daniel Mahony, Gareth Powell and James Douglas, make a strong case for investing in large defensive healthcare stocks. Healthcare is going through a structural disruption which will create winners and losers and will involve “nudging patients, persuading doctors, corralling politicians and influencing payers.” The challenge and opportunity for these managers “is to find companies and management teams that are adapting to a rapidly changing healthcare landscape.”
For something completely different, journalist Jayna Rana is looking at why younger people are "demotivated and delusional" about investing and why investing early is “the most important thing.” I can’t imagine many of our readers are in their 20s (please do let me know if I’m wrong) but you may well have family or friends in this age group who need a nudge to start investing and this is the article for them. Our video, “Your investment journey" is also a good place to start for someone new to investing.
Finally, the new 2019 Investment Trust Handbook is out. This includes a wide range of insights from lots of industry experts from our longest serving manager, Peter Spiller of Capital Gearing, to Alex Wright of Fidelity Special Values. If you are interested in purchasing a copy please get in touch with the publisher, Harriman House.
Wishing you all the best for 2019!
Annabel Brodie-Smith
Communications Director, AIC
Just what the doctor ordered
Ian Cowie dissects a relatively good year for biotech and healthcare investment companies
Ian Cowie
Many investors may be feeling a bit queasy after stock markets’ feverish finish to last year and a shaky start to 2019. But some exposure to biotechnology and healthcare investment companies could be just what the doctor ordered to calm nerves and deliver healthy returns in future.
This sector has strong defensive qualities - because people will always fall ill, regardless of whatever else is happening in the economy - and good growth prospects, as new medicines are discovered to treat illnesses that used to be incurable. Shares in biotechnology and healthcare companies can also be regarded as the ultimate ethical investment because providing the capital necessary for medical and pharmaceutical research offers investors a practical way to do well by doing good.
"This sector has strong defensive qualities - because people will always fall ill, regardless of whatever else is happening in the economy - and good growth prospects, as new medicines are discovered to treat illnesses that used to be incurable"
Ian Cowie
Never mind the theory, though, how have these investment companies fared in practice? Despite sickly returns from many shares in 2018, biotechnology and healthcare delivered an average gain of 7.7% compared to a loss of 3.4% for all conventional investment companies.
To put those performance figures in perspective, over the same period the FTSE All-Share index - a broad measure of the British stock market - fell by 9.5% and the average open-ended fund or unit trust fell by 6.1%. So the biotechnology and healthcare investment company sector demonstrated its robust defensive characteristics in last year’s challenging markets.
More importantly and more positively, these investment companies have tended to deliver healthy returns over the medium and long term. For example, the average share price return from this sector over the last five years to January 3 was 111% and over the last 10 years it was 401%. Both compare well to the averages for all conventional investment companies over the same periods of 63% and 293%.
However, even well-established pharmaceutical companies face challenges as governments and insurers seek to restrain medical price inflation and drugs fall out of patent protection to compete with generic rivals. Scientific research is also notoriously expensive and hit or miss, often with binary outcomes of success or failure.
These potential risks are reflected in the widely-differing returns from investment companies in this sector. For example, the top-performer over the last year and five years to January 3 was Syncona. This used to be listed as the Battle Against Cancer Investment Trust, until it acquired life science funds run by the leading charities Wellcome Trust and Cancer Research UK a couple of years ago.
"Despite sickly returns from many shares in 2018, biotechnology and healthcare delivered an average gain of 7.7% compared to a loss of 3.4% for all conventional investment companies"
Ian Cowie
Syncona delivered sparkling share price returns of 33% and 139% over these periods, according to independent statisticians Morningstar. By contrast, my long-standing shareholding in Worldwide Healthcare Trust lagged behind with a sickly 2.7% shrinkage over the last year but more than doubled my money, rising by 104%, over the last five years.
Although Worldwide Healthcare lost its lead fund manager just over a year ago, the rest of an experienced team remains in place. Long-term returns of 390% over the last 10 years mean it retains its place in my ‘forever fund’ or portfolio of investments with which I intend to pay for retirement.
Both the above companies’ primary aim is capital growth and they pay little or no dividends. Income-seeking investors may be interested in rivals such as International Biotechnology, which yields 4.9%, and BB Healthcare, which yields 3.4%.
It’s also worth noting that you can obtain exposure to healthcare via some investment companies in other sectors. For example, I am also a shareholder in Woodford Patient Capital where just over half the underlying assets are allocated to healthcare shares.
Investment companies’ ability to offer dedicated fund management and to diminish risk by diversification can make them a useful way to gain a stake in fast-moving specialist areas about which individual investors may know next to nothing. That would be a fair description of my knowledge of research into the human genome or the latest developments in blood cell therapies.
This is why I intend to retain shareholdings in Worldwide Healthcare Trust and Woodford Patient Capital - and have recently invested in Syncona. It would be wonderful to help find a cure for serious illnesses, while to some extent inoculating my portfolio against short-term share price volatility and aiming to do well by doing good.
Bigger is better
Polar Capital Global Healthcare explain why big pharma companies shouldn't be ignored
Daniel Mahony, Gareth Powell and James Douglas - Fund Managers, Polar Capital Global Healthcare Trust
As well as disruption and innovation coming from smaller, more nimble companies, we are now seeing the proactive, larger businesses driving structural change across the healthcare sector.
Since early 2017, small and mid-cap healthcare companies have significantly outperformed the large caps. This started to reverse in the second half of 2018 and while we are not disputing the level of innovation we are seeing in small companies, we think some of their valuations are looking stretched.
By comparison, valuations of large healthcare companies continue to look attractive on a relative and absolute basis – the sector’s price/earnings ratio is in line with the market on a relative basis and is at its long-term absolute average. For investors, these large companies offer the potential of steady earnings growth, strong cash generation and, ultimately, compounding returns for investors.
"As well as disruption and innovation coming from smaller, more nimble companies, we are now seeing the proactive, larger businesses driving structural change across the healthcare sector"
Polar Capital Global Healthcare Trust
Given the potential uncertainties going into 2019 – Brexit, trade wars, rising interest rates, geopolitical uncertainty etc – we think there is a strong case to be made for investing in large healthcare stocks that offer defensive growth. Our focus is on large companies adopting proactive business strategies to embrace and drive change in the way healthcare is being managed, delivered and paid for.
Structural change in any industry has the potential to create winners and losers and healthcare will be no different. In 2017, we articulated a two-pronged investment strategy:
1. Focus on large-cap consolidators adjusting to change.
2. Identify small/mid-cap innovators disrupting the industry.
Over the past year, we have seen a significant change at some of the larger companies that has begun to blur these two trends. We are now seeing healthcare management teams becoming more proactive, developing innovative business strategies, disrupting healthcare value chains and building competitive barriers to entry. We are entering a new phase of structural disruption that is not just about a new therapy or developing a new technology to address a problem (such as GP visits).
"For investors, these large companies offer the potential of steady earnings growth, strong cash generation and, ultimately, compounding returns"
Polar Capital Global Healthcare Trust
While all of these are still important and can be good investments at the right price, the next phase of disruption requires a realignment of interests across the value chain and relies on collaboration. Dealing with this type of complexity is more the preserve of large companies. All the stakeholders need to be engaged which means nudging patients, persuading doctors, corralling politicians and influencing payers.
Certain management teams in the sector are adopting a deliberate strategy, trying to be the agents of change. Driven partly by their own vested interest, it also reflects a recognition that healthcare disruption is inevitable.
Not all large companies are capable or willing to drive such change and some will get left behind. There are many companies that are more reactive, often reeling from the new regulations or procedures being forced upon them by a regulator or by a payer.
Not all proactive strategies will succeed and creating alignment among a diverse set of stakeholders is never easy, even for an industry leader. Nevertheless, we do see a few themes emerging that are a useful guide to which companies may be successful. For instance, management teams of large-cap companies are getting ahead of healthcare affordability challenges, the most obvious of which is US drug pricing. We are seeing some pragmatic approaches to pricing that are a significant diversion from standard industry practice. The migraine market in the US is a great example of how quickly the pricing landscape is changing.
The challenge and opportunity for us is to find companies and management teams that have differentiated assets and are adapting to a rapidly changing healthcare landscape. Not all large companies will drive such change but we are already seeing large companies adopt a proactive strategy to be the agents of change. These are the ones making investment decisions today that will help shape the future of healthcare tomorrow.
My generation
Investment Week columnist Jayna Rana tells us why her age group should be seeking a financial head start with investment companies
Jayna Rana
53% of 22 to 29-year-olds have no savings, according to the Office for National Statistics’ most recent Wealth and Assets Survey. And out of those that do, nearly 40% have saved no more than £1,000.
When I ask my friends, almost all of whom sit within this bracket, if they save, most claim they cannot afford to. They all pay ridiculous amounts of rent, have student debts and live that oh so glamorous, avocado-encrusted London lifestyle. I get it. What is the point in saving £200 a month just to get £65.48 at the end of the year?
Yet we are constantly berated by society for not having the money to get on the property ladder despite house prices still being sky-high, and made to panic further because apparently our pensions won’t be enough to live on post-retirement. Oh, and we are living longer. It’s a vicious cycle making us demotivated and delusional and sometimes it feels like the only thing to do is ignore it.
But there is a solution: investing.
Yes, initial thoughts may jump to risk. But leaving to chance whether or not you will have the money to enter retirement comfortably is riskier. And that’s the bonus with investing now, while you are still twenty-something. Even if you can only afford to put away £50 a month, old age is SO FAR AWAY. In comes the investment company.
Investment companies have many structural advantages over their open-ended counterparts such as the option to gear, invest in more illiquid asset classes such as private equity and infrastructure and the opportunity to make so much more money if you enter an investment company on a discount and over time it starts trading at a premium.
You do not have to worry about constant flows, redemptions and sudden suspensions as have been seen with OEICs. You can put your money away and almost forget about it. Most of us wouldn’t even notice that monthly £50 going out – it’s just another phone bill right? But instead of ending up with a three-generation-old iPhone with a cracked screen at the end of the two-year contract, you could end up with some very attractive returns. Over the last two years, investing in Baillie Gifford’s Scottish Mortgage Investment Trust would have upped your initial sum by 40 %. Over a decade? Up by 600%! A regular contribution would make this even higher.
Doing something new in any part of life can be daunting and even more so when money – and therefore its potential loss – is involved. But investment companies have been around for over 150 years, standing the test of time and also two world wars and countless recessions. But now with the help of trade bodies such as the AIC, new regulations pushing for greater transparency and less jargon, and the abundant supply of guides and information to be found online, investing doesn’t have to be daunting. In fact, once you get the hang of it, it is pretty straightforward.
But the most important thing is to start early.
"Over the last two years, investing in Baillie Gifford’s Scottish Mortgage Investment Trust would have upped your initial sum by 40%. Over a decade? Up by 600%!"
Jayna Rana
As more young people invest, one would hope the word spreads further and financial institutions realise they need to help this demographic more than anyone else. The wider public – and that includes schools – has a social responsibility to ensure we are aware of the benefits and risks of investing so we can make informed decisions as soon as possible.
Then by the time we reach retirement, we will be pleased to be able to buy all the avocados we want.
