International Biotechnology Trust (IBT) has delivered a solid performance of 14.3% in NAV terms this year and grown its dividend by 4.1% in the face of difficult conditions for biotech companies.
Volatility in broader equity markets – spooked by fears of a trade war, the Brexit debacle, and tensions in the Middle East – has not helped biotech, which tends to perform poorly in ‘risk off’ environments, but IBT’s unquoted portfolio, a unique feature of the trust, has lent considerable support to NAV returns during a period when the listed portfolio has struggled.
The trust’s decision to pay out 4% of NAV annually in the form of dividends, drawn entirely from capital, continues to pan out well for investors who have seen a full year dividend of 28p in 2019, up 4.1% on last year’s payout and more than 20% higher than the dividend in 2017. In yield terms, the trust stacks up strongly even against trusts designed specifically for income investors – with a higher yield than the average trust in the UK Equity Income sector – and the trust’s discount has narrowed sharply on the back of steady demand for its shares since the income commitment was introduced.
2019 has been a bumpy ride for biotech investors with gains made in the first half lost in the autumn, before a sharp rebound in October. Healthcare is a traditional football for all candidates in the run up to a general election in the United States, so more volatility is not unlikely. The managers say prices are depressed relative to other S&P sectors, but think the fortunes of the sector could improve ahead of the US election as the market begins to realise the extent to which valuations are depressed.
In our view the biotechnology sector has significant tailwinds behind it, and this trust is well set up to benefit from them whilst avoiding the worst of the volatility which tends to torment investors in more ‘risk on’ sectors like this. The trust’s unique focus on avoiding binary risk events has helped it to avoid a number of ‘blowups’ which have affected its rivals, and its unique unquoted portfolio is already proving its worth, with an average yearly internal rate of return (IRR) of 16% despite the venture fund being only 70% invested at this stage. Expected distributions from the fund mean that IBT will only need to make limited cash contributions going forward to meet its commitment.