Ian Cowie: a buying opportunity for contrarian investors

Our columnist explains why despite short-term underperformance he is in it for the long haul with trusts that invest in this part of the market.  

News that everyone in Britain aged over 50 will be offered Covid-19 booster vaccines this autumn suggests that, however much we may wish the virus would go away, for the foreseeable future it is here to stay.

Elsewhere, the European Union, according to The Financial Times, is said to be about to sign contracts stretching into 2024 to buy Covid jabs from the pharmaceutical giants Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA).

Similar initiatives can be seen around the globe, including new lockdowns against the lurgy in China.

These trends should prove positive for big pharma businesses, making vaccines, but with so much bad news elsewhere blighting investors’ confidence, this has yet to be fully reflected in share prices. The same can be said for investment trusts in the Biotechnology & Healthcare sector, which have suffered sickly 'returns' averaging -12% over the last year.

Here and now, is this a buying opportunity? Long-term investors have certainly enjoyed healthy returns for helping to capitalise the fight to find cures for a wide range of illnesses.

For example, the Association of Investment Companies (AIC) Biotechnology & Healthcare sector delivered average returns over the last decade of 287%, according to independent statisticians Morningstar. That compares with total returns of 188% over the same period from AIC trusts of all types.

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Never mind the generalities, here’s my personal experience as a shareholder in Worldwide Healthcare (LSE:WWH) over more than the last decade. This £2.4 billion giant leads its sector over the last 10 years with total returns of 338%, but slumped to a 12% loss over the last year.

Despite such short-term setbacks, WWH’s long-term capital growth continues to earn it a place in my top 10 shareholdings by value. This is generated by a widely diversified portfolio of pharmaceutical blue chips led by AstraZeneca (LSE:AZN), Pfizer and Roche (SIX:ROG).

WWH’s trivial dividend yield of 0.8% is nothing to get excited about. More positively, I continue to regard it as a great example of investment trusts’ ability to give ordinary mortals exposure to sectors where we may know next to nothing for a modest annual fee of 0.9%.

International Biotechnology Trust (LSE:IBT) gives me access to even more specialist sub-sectors and displays a similar mismatch between long-term gains and short-term losses. IBT is up by 326% over the last decade but down by 4% over the last year.

As you might expect, the underlying holdings include fewer familiar names, led by 10% in “unquoted assets”, followed by half as much in Horizon Therapeutics (NASDAQ:HZNP) and slightly less in Neurocrine Biosciences (NASDAQ:NBIX).

IBT, in contrast to WWH, pays us to be patient with a healthy dividend yield of 4.6%. Ongoing charges of 1.2% are an irritation, compared to the sector average of just under 0.9%.

WWH is trading on a slightly higher discount to net asset value (NAV) of 6.8%, compared to 5.8% for IBT. 

Investors unconvinced by my hopes that IBT and WWH will get over short-term setbacks and return to their long-term growth trends may prefer Polar Capital Global Healthcare (LSE:PCGH). It leads this sector over the last year and five-year periods, with total returns of 22% and 60%, although its ten-year total is relatively less impressive at 214%.

PCGH’s underlying portfolio is led by the biggest healthcare company in the world, Johnson & Johnson (NYSE:JNJ), the medical insurer UnitedHealth (NYSE:UNH) and the French pharmaceutical giant, Sanofi (EURONEXT:SAN). PCGH’s yield is just over 0.6%. Its charges are modest at 0.83%. It is also trading on a discount, of 5.1%.

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To return to where we began, massive sums of capital are required to fund medical research - and most of that money is wasted when hopes of new pills and potions are dashed. But the speed with which Covid vaccines were developed demonstrates what can be achieved.

Individual investors who are keen to make our money matter can play a small part in this process. Healthcare shares may also prove defensive assets, because people will continue to fall ill and be willing to pay to feel better, regardless of the economy.

Rising inflation and interest rates remain major clouds of uncertainty over this sector, which is dominated by ‘jam tomorrow’ stocks. The typical Biotechnology & Healthcare share offers hopes of great growth in future, while delivering little by way of dividends today.

So only contrarians are likely to consider this sector, now it has fallen from financial fashion. But those of us who believe that buying low is often the first step towards making a profit may find bargain opportunities. I intend to top up existing holdings when dividend income allows.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in International Biotechnology Trust (IBT), Pfizer (PFE) and Worldwide Healthcare (WWH) as part of a globally diversified portfolio of investment trusts and other shares.