Although recent performance numbers may be underwhelming, International Biotechnology Trust is enjoying something of a renaissance.
Nine days ago the trust’s board, chaired by chartered accountant John Aston, confirmed a double-digit increase in the dividend it paid to shareholders earlier this year.
It also announced that the next half-yearly dividend, payable at the end of July, would be of the same size (13.5p per share), resulting in an annual dividend equivalent to four per cent.
The trust invests in biotech companies that do not pay dividends
For a trust that invests in biotech companies that do not pay dividends, this may seem somewhat strange. But the board took the decision in 2016 that an income – paid from the trust’s capital reserves (profits) – would widen the fund’s appeal at a stroke, making it attractive to income investors. It was right.
It took a while for wily manager Carl Harald Janson – a 60-year- old Swedish former doctor and pharmacist – to be convinced by the board’s move but he has now been won over.
Talking from his home in Stockholm last week while enjoying two consecutive bank holidays – Walpurgis Night followed by Labour Day – he told The Mail on Sunday: ‘Yes, initially I resisted the board’s suggestion that the trust should pay a dividend but there is no doubt that 99 per cent of the shareholders I have spoken to since are positive about the move. Together with a separate decision to change the way we invest in some of the world’s unquoted biotech stocks, we seem to have come up with a magic brew. Everyone – the board, our investors and me – is happy.’
Strategy: The portfolio’s emphasis on large biotech companies has been toned down
The evidence of overwhelming shareholder approval can be seen in how the trust’s discount – the gap between the value of the fund’s assets and the valuation the market puts on them – has narrowed. As high as 12 per cent prior to the income move, it has now reduced to around five per cent, indicating greater demand for the shares.
Janson has also been quietly making adjustments to the trust’s portfolio. Slowly but surely, direct holdings in unquoted biotech companies are being reduced (they now stand at 5 per cent) with exposure to the sector now increasingly obtained via a stake in a specialist venture capital fund run by SV Health Investors, the same company Janson works for. He says the fund provides a ‘more practical and diversified’ investment option than direct holdings.
Change of heart: Manager Carl Harald Janson initially rejected the decision to pay a dividend
The portfolio’s emphasis on large biotech companies – the likes of Gilead and Regeneron – has also been toned down. Janson believes better value lies in the ‘mid cap’ space – companies with market capitalisations of between $1billion and $10billion. The result is that large cap exposure has come down in the last eight months from 50 to 36 per cent.
‘We have tickled up our exposure to companies such as Array, Exelixis and Genmab as a result,’ adds Janson. ‘They are all developing drugs and antibodies to combat different forms of cancer. They have drugs that have been approved for use.’
Janson accepts that there may be future hiccups. President Trump has already vowed to bring down drug prices which would hit the revenues of most biotech companies – the trust’s portfolio is primarily invested in US and Canadian stocks. But he is encouraged by the stream of new drugs coming on to the market.
‘Over the last 20 years, exposure to biotech stocks has generated average annual returns of 12 per cent,’ says Janson. ‘If repeated, there is no reason why we cannot generate an average annual return of at least that amount.’