Biotech innovation outpaces fund performance

The biotech sector is going through a renaissance as innovation takes off according to one successful fund manager, but data shows that performance over the last three years has been far less than stellar.

According to FE Analytics, the biotech sector within the FCA Recognised universe returned a negative 7.5% over the three years to 31 May 2018.

When the top five performing biotech funds domiciled in Luxembourg or Ireland are examined, only two funds posted positive returns – Hauck & Aufhaeuser’s RIM Global Bioscience B fund (up 41.9%) and the Polar Capital Biotechnology I GBP fund (up 19.9%).

The rest of the funds in the sector saw a drop in performance during the global selloff during late 2015 to early 2016 and have yet to recover.

Out of all the biotech funds looked at, Polar Capital’s successful biotechnology fund had the smallest weighting towards North American companies at 56.5% over the three-year period. The rest of the funds mostly had an allocation above 90%.

Five year view

When looking at the sector’s five-year performance to 31 May 2018, all the biotech funds fared much better with Hauck & Aufhaeuser’s Rim Global Bioscience B fund gaining 179.4%.

This was followed by Fundpartner Solutions HBM Global Biotechnology at 134.6%, Candriam Equities L Biotechnology N at 104.7%, Multiconcept PPF PMG Global Biotech at 95.5%, and Franklin Biotechnology Discover A Accumulation at 94.7%.

All the funds had over 75% allocated towards North American firms.

As the sector’s five-year performance of 80.5% is much more positive, it suggests a longer investment time horizon for biotech funds is important. Although, while these results were better, the S&P 500 over the same five year time frame returned 84.2%.

Both the Polar Capital and the Variopartner funds did not have five-year performance figures.

Innovation

Polar Capital portfolio manager David Pinniger told Portfolio Adviser sister publication Expert Investor that the biotech sector only really kicked off around 2011 and 2012 when developments from the early 2000 started to bear fruit into new drugs and development technology.

“The sector is really vibrant at the moment with exciting tech that can deliver medicines to patients in new ways like gene and cell therapy,” he said.

Pinniger noted that there had been investor concerns regarding drug pricing, and controversy driven by political rhetoric in the US due to the US election but that it was all noise.

Currently, US pharmaceutical and healthcare companies are preparing for US president Donald Trump’s announcement on lowering drug prices which is expected to create a period of uncertainty in the sector.

Asian biotech bubble

While the US has always been associated with biotech innovation because of its large teaching hospitals and academic centres, Pinniger said there was a lot of excitement in biotech, life sciences, and tech in Asia.

“We’re going through a bit of a mini-Chinese biotech bubble where there’s a huge amount of interest in life sciences and biotech in China,” he said.

“We’ve also seen a lot of domestic investments in China and a lot of Chinese capital coming to the US and Europe trying to find investments into higher quality work. So it’s quite a vibrant fluid.”

In late April, the Hong Kong stock exchange relaxed its listing requirements for emerging and innovative companies in a bid to encourage the biotech sector. The relaxed rules allow biotech issuers to list without needing to meet any financial eligibility tests of the main board.

While this could potentially carry risks to investors, the stock exchange has formed a biotech advisory panel for new listings under the new regime.

“The feeling is that this will be a catalyst for a wave of early stage biotech companies and that there will be a lot of appetite among domestic investors whether it is private, retail, or institutional,” Pinniger said.

Risks

The Polar Capital portfolio manager said that fund selectors tended to focus on the sector’s risks such as drugs failing, not receiving approval, or being withdrawn from the market. But he said concentrated biotech portfolios were actually less risky than passive funds.

“The temptation is that when you’re trying to handle sector risk you diversify that risk by holding more companies. But to us that is completely the wrong thing to do because all you end up doing is accumulating risk with more risky companies,” Pinniger said.

“You want to chop that long risk tail off and have a concentrated portfolio that is quite actively managed. That appeals because if you manage risk properly then you stand a good chance of a material return.”

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