Healthcare and biotech trusts withstand the sell-off

The specialist healthcare and biotech investment trusts have been one of the best performing areas of the market during the pandemic and have delivered excellent long-term returns.

According to data from the investment trust analysts at Winterflood Securities, over the last three months the share prices of the seven biotech and healthcare trusts have lost an average of just one percent of their value and over five years they are up 50%. By comparison, the UK Equity Income sector has fallen by 28%, which has eliminated all the gains of the last five years.

Most of the underlying companies that operate in the sector have nothing to do with the fight against Covid-19. The reason their share prices have held up is because the demand for the treatments they offer for other chronic conditions hasn’t been affected by the current crisis.

In short, healthcare is a classic non-discretionary item. If the demand and production is unaffected then their profits should be largely unscathed and they may be able to continue to pay their dividends, unlike most of the wider market.

In the front line

One fund that has increased its exposure to the fight against Covid-19 is the £274m International Biotechnology Trust (LON:IBT). It did this by adding to its holding in Gilead Sciences (NAS:GILD), thereby taking the company to six percent of net assets.

Gilead may potentially have an antiviral treatment for coronavirus and is currently running trials for its pipeline drug, Remdesivir, to understand the efficacy and safety of it for Covid-19. There has been a lot of speculation about whether or not it will work, but if it is successful it would be a game changer for the company and the market in general.

Since he took over in September 2013, lead manager Carl Harald Janson has established a solid track-record through his stock-picking approach with NAV total returns of 15.8% per annum, compared to 15% for the Nasdaq Biotech Index. The fund has a dividend yield of four percent of NAV that is paid from capital and it is currently trading on a wider than normal discount to NAV of eight percent.

Shoulder to shoulder

Its closest competitor is the £463m Biotech Growth Trust (LON:BIOG), managed by Geoff Hsu. He believes that the coronavirus outbreak will be a temporary phenomenon and will not have a long-term fundamental impact on the biotech industry.

Hsu has said that the market dislocation provided an ideal buying opportunity for long-term investors in the sector as the fundamental investment themes remain intact. The political risk has also diminished with Joe Biden essentially winning the democratic nomination for the US Presidential election.

Over the last ten years the fund has generated an impressive share price total return of 492%. It is currently trading on a ten percent discount to NAV.

Broader exposure

The largest investment trust in the sector is the £1,948m Worldwide Healthcare Trust (LON:WWH), which is trading on a tight discount of just 0.5%. It offers a broader exposure to healthcare and biotech and has generated a ten-year share price total return of 437%.

Manager Trevor Polischuk has said that the pandemic provides opportunities for biopharma companies within the diagnostics industry that are working to increase testing capacity. It could also deliver a boost for businesses that are looking for an effective vaccine or to develop treatments for patients who are already infected with Covid-19.

Despite this he thinks that the commercial sustainability of these projects might be short-lived and has reaffirmed the fund’s focus on the positive fundamentals of the industry as whole. As the performance has demonstrated, the sector offers the attractive combination of defensive attributes and long-term growth.