Launched in June 1997, this trust seeks capital appreciation through investment in a diversified portfolio of shares and related securities in the worldwide biotechnology industry.
The vehicle is managed by Geoffrey Hsu and Richard Klemm of OrbiMed Capital, and measures its performance against its benchmark, the Nasdaq Biotechnology index (sterling adjusted).
OrbiMed Capital is a US-based firm that utilises a bottom-up stock selection process “driven by intensive proprietary research, which involves company visits and developing an understanding of commercial prospects and development programmes for individual drugs”, the company says.
The trust’s board seeks to manage risk by imposing various investment limits and restrictions, including not investing more than 15 per cent of the value of its gross assets in any one individual stock at the time of acquisition. The vehicle will also not invest more than 10 per cent of the value of its gross assets in direct unquoted investments at the time of purchase. In addition, borrowings will not exceed 20 per cent of the company’s net assets.
Mr Hsu notes that OrbiMed took over the portfolio management of The Biotech Growth Trust in 2005, and since then the investment strategy has generally remained the same.
He adds: “Given that healthcare demand is typically less sensitive to macroeconomic factors and most of the risk in biotechnology is particular to the specific drugs being developed, macroeconomic factors are generally not considered in the investment process.”
Performance of the trust has been consistently strong, delivering a total return of 448.66 per cent for the five years to July 1 2015, compared with the 382.73 per cent rise in the Nasdaq Biotechnology index and the AIC IT Biotechnology & Healthcare sector average of 249.59 per cent in the same period, data from FE Analytics shows.
The vehicle has also outperformed both the index and the sector across one, three and 10 years, with its 10-year performance of 759.27 per cent more than 200 percentage points ahead of the 540.94 per cent rise in the Nasdaq Biotechnology index.
Mr Hsu explains: “The portfolio consists of a balance of large profitable biotech companies, as well as smaller emerging biotech firms that have not yet reached profitability. The holdings are continually refreshed based on whatever value-driving catalysts are on the horizon, whether they be clinical trial results, drug approval decisions or earnings reports. There have been no recent changes to the general structure of the vehicle. The gearing in the trust is roughly 15 per cent, consistent with the portfolio manager’s positive outlook on the sector.”
As OrbiMed nears its 10th anniversary of running the trust, the manager notes some of the top-performing holdings for the year to date include Synageva BioPharma, which was acquired by Alexion Pharmaceuticals at close to a 140 per cent premium.
Mr Hsu notes that other strong contributors include “Neurocrine Biosciences – whose partner AbbVie announced positive phase-three results for its drug elagolix in endometriosis in January – and Bluebird Bio, which announced encouraging results for its gene therapy treatment for beta thalassemia and sickle cell disease”.
On the flip side, some of the less positive performers include Puma Biotechnology, which reported phase-three breast cancer data at a cancer conference that disappointed expectations. Meanwhile, Fluidigm – which made an acquisition that was perceived poorly by investors – and Avalanche Biotechnologies – which announced mixed phase-two data for its drug for macular degeneration – also detracted from performance.
In spite of this, Mr Hsu notes the team continues to have a positive outlook on the biotech industry due to its strong fundamentals. “Innovation in research and development remains robust, the US Food and Drug Administration regulatory climate is favourable to approving new drugs, merger and acquisition activity is expected to continue, and valuations of profitable biotech companies are still reasonable from a historical perspective given their expected earnings growth,” he explains.
EXPERT VIEW
Darius McDermott, managing director, Chelsea Financial Services
This is an exceptional trust run by US specialist asset manager OrbiMed. The portfolio is certainly high up the volatility and risk spectrum, but investors have been consistently well rewarded. It is the standout investment vehicle in the sector, far outperforming its benchmark and the handful of other funds specialising in this field. This trust is not cheap: the ongoing charge is 1.2 per cent, rising to more than 2 per cent when the performance fee kicks in. But it seems to be worth paying for given the impressive returns. It has posted small, single-digit losses in just two of the past 10 years, with good double-digit returns in the other eight.
