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Just what the doctor ordered

11 January 2019

Ian Cowie dissects a relatively good year for biotech and healthcare investment companies.

Many investors may be feeling a bit queazy after stock markets’ feverish finish to last year and a shaky start to 2019. But some exposure to biotechnology and healthcare investment companies could be just what the doctor ordered to calm nerves and deliver healthy returns in future.

This sector has strong defensive qualities - because people will always fall ill, regardless of whatever else is happening in the economy - and good growth prospects, as new medicines are discovered to treat illnesses that used to be incurable. Shares in biotechnology and healthcare companies can also be regarded as the ultimate ethical investment because providing the capital necessary for medical and pharmaceutical research offers investors a practical way to do well by doing good.

Never mind the theory, though, how have these investment companies fared in practice? Despite sickly returns from many shares in 2018, biotechnology and healthcare delivered an average gain of 7.7% compared to a loss of 3.4% for all conventional investment companies.

To put those performance figures in perspective, over the same period the FTSE All-Share index - a broad measure of the British stock market - fell by 6% and the average open-ended fund or unit trust fell by 2.6%. So the biotechnology and healthcare investment company sector demonstrated its robust defensive characteristics in last year’s challenging markets.

More importantly and more positively, these investment companies have tended to deliver healthy returns over the medium and long-term. For example, the average share price return from this sector over the last five years to January 3 was 111% and over the last 10 years it was 401%. Both compare well to the averages for all conventional investment companies over the same periods of 63% and 293%.

However, even well-established pharmaceutical companies face challenges as governments and insurers seek to restrain medical price inflation and drugs fall out of patent protection to compete with generic rivals. Scientific research is also notoriously expensive and hit or miss, often with binary outcomes of success or failure.

These potential risks are reflected in the widely-differing returns from investment companies in this sector. For example, the top-performer over the last year and five years to January 3 was Syncona. This used to be listed as the Battle Against Cancer Investment Trust, until it acquired life science funds run by the leading charities Wellcome Trust and Cancer Research UK a couple of years ago.

Syncona delivered sparkling share price returns of 33% and 139% over these periods, according to independent statisticians Morningstar. By contrast, my long-standing shareholding in Worldwide Healthcare Trust lagged behind with a sickly 2.7% shrinkage over the last year but more than doubled my money, rising by 104%, over the last five years.

Although Worldwide Healthcare lost its lead fund manager just over a year ago, the rest of an experienced team remains in place. Long-term returns of 390% over the last 10 years mean it retains its place in my ‘forever fund’ or portfolio of investments with which I intend to pay for retirement.

Both the above companies’ primary aim is capital growth and they pay little or no dividends. Income-seeking investors may be interested in rivals such as International Biotechnology, which yields 4.9%, and BB Healthcare, which yields 3.4%.

It’s also worth noting that you can obtain exposure to healthcare via some investment companies in other sectors. For example, I am also a shareholder in Woodford Patient Capital where just over half the underlying assets are allocated to healthcare shares.

Investment companies’ ability to offer dedicated fund management and to diminish risk by diversification can make them a useful way to gain a stake in fast-moving specialist areas about which individual investors may know next to nothing. That would be a fair description of my knowledge of research into the human genome or the latest developments in blood cell therapies.

This is why I intend to retain shareholdings in Worldwide Healthcare Trust and Woodford Patient Capital - and have recently invested in Syncona. It would be wonderful to help find a cure for serious illnesses, while to some extent inoculating my portfolio against short-term share price volatility and aiming to do well by doing good.

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