InvestmentsJul 11 2016

Fund Review: Axa Framlington Biotech

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She says: “The fund targets firms that are seen as offering the highest probability of clinical, regulatory and commercial success. Our unconstrained approach allows us to select companies with the best fundamentals across a global universe and a wide market-cap spectrum.”

The portfolio comprises high-conviction, best ideas investments, which are selected via a rigorous bottom-up, stock-selection process using the Nasdaq Biotechnology index for reference purposes. Ms Thomson notes the fund is diversified across sub-sector and capitalisation lines, “such that respective allocations directly result from individual stock selections”.

Unsurprisingly, the portfolio has a bias towards the US as the manager notes this is where the majority of biotechnology companies are domiciled.

She explains: “We continue to look for innovative firms targeting diseases with high unmet medical needs. All members of the healthcare team at Axa IM have scientific backgrounds – we believe this is essential for specialist investors in this sector.”

The manager says macroeconomic factors do affect her process, with macro inputs shaped by the views of Axa IM’s international research and investment strategy team. “Macroeconomic dynamics are shaping the trading of biotechnology stocks more than sector fundamentals. Biotechnology is a relatively defensive business, but it is also very sentiment driven. Risk appetite is therefore an important aspect of overall sector performance,” she adds.

Ms Thomson made a couple of changes to the portfolio in May this year, reducing its position in Spark Therapeutics following a period of strong performance, and adding to its holding in Merrimack Pharmaceuticals, where she felt the market was not adequately valuing the company’s pipeline. “We see particular value in the small- and mid-cap space, which has sold off more aggressively than the broader sector,” she notes.

“The indiscriminate and sentiment-driven sell-off has left small-cap stocks at near historic low premiums of enterprise value to cash, giving us the chance to add selectively to the portfolio at attractive prices.”

The clean Z accumulation share class has a risk-reward rating of six out of seven, with ongoing charges of 0.83 per cent, its key investor information document shows .

EXPERT VIEW - Rob Morgan, pensions and investment analyst, Charles Stanley Direct

This specialist fund has been a stellar performer in recent years, and thus a popular choice with adventurous investors. While it has not appreciably outperformed its Nasdaq Biotechnology index benchmark over the longer term, there is a case to be made for active management in a sub-sector where in-depth knowledge of drug pipelines and industry developments can provide a valuable edge. In this regard it remains a solid choice for exposure to the area.

Over the five years to June 30 2016 the fund has slightly underperformed its benchmark, the Nasdaq Biotechnology index, delivering 180.4 per cent versus the index’s gain of 190.9 per cent. In the past year, performance figures from FE Analytics show the fund has suffered from the sell-off to which the manager refers. In the past 12 months the vehicle made a loss of 22 per cent, while the index was down 19.1 per cent.

Ms Thomson says in spite of the recent disappointing performance, the sector fundamentals remain sound, though she warns it may take a while for the return of “more bullish sentiment”.

Non-US stocks have generally held up better than the US sector over the past six months. She notes: “Within the fund, Actelion has performed well following successful launches of its new PAH [pulmonary arterial hypertension] treatments and after it became clear that it would take longer for competitors to bring generic versions of blockbuster drug Tracleer to market. Similarly, Spark Therapeutics performed strongly after revealing promising data for a gene therapy to treat haemophilia.”

The manager admits the vehicle’s overweight in small-cap stocks has hit performance. “The fund is positioned to exploit the opportunities from new innovations across the biotechnology sector, and these are generally concentrated in smaller-cap stocks. The fund also had a number of poor clinical trial announcements during the period. Holdings such as Threshold, Chimerix and BioCryst all reported negative proof of concept data with lead assets.

“Although each was a relatively small position, appropriately sized for their risk-reward potential, in aggregate they contributed significantly to relative underperformance.”