Ian Cowie: sickly returns during pandemic for healthcare trusts

10th February 2022 09:12

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Our columnist is continuing to back health to deliver long-term wealth, despite performance disappointing during Covid.

Investors who believe it pays to follow the money had better get used to living with the coronavirus - and its Omicron variant - as anti-viral pills become available on the NHS. Better still, government pledges to catch up with the backlog of treating other illnesses mean expenditure is likely to rise across a wide range of biotechnology and healthcare sectors.

Both news events should accelerate long-term trends towards older and wealthier populations around the world spending more on feeling healthier.

Investment trusts offer a convenient and cost-effective way to share the cost of professional stock selection in specialist areas where this investor knows next to nothing.

However, it is only fair to add that some of the biggest and best-known shares in the Association of Investment Companies (AIC) ‘biotechnology and healthcare’ sector have been too clever by half in the Covid crisis so far and delivered surprisingly sickly returns.

Step forward Worldwide Healthcare (LSE:WWH), a £2.2 billion giant in which I have been a shareholder for more than a decade, after transferring them into my self-invested personal pension (SIPP) at £13.53 in March 2014. Total returns of 350% over that decade, according to independent statisticians Morningstar, lifted this trust to become my eighth-most valuable holding, priced at £31 each this week.

Less happily, WWH shares returned only 48% over the last five years and lost 20% of their value over the last year. No wonder the shares are currently trading at a 6.5% discount to their net asset value (NAV), despite favourable macroeconomic tailwinds.

Similarly, International Biotechnology (LSE:IBT) - another of my investment trusts in this sector - delivered healthy total returns of 331% over the last decade, but a relatively sickly 40% over the last five years, followed by 19% shrinkage over the last year. This more specialised trust with £276 million in total assets, and trades 3.1% below its NAV.

The explanation is that both seasoned teams of stock selectors managed to miss Pfizer (NYSE:PFE), the American pharmaceutical giant which was first to gain Federal Drug Administration (FDA) authorisation for a Covid vaccine in 2020. More recently, Pfizer has begun producing Paxlovid pills to help people who have already caught the disease.

Britain’s health secretary Sajid Javid said the pills would be available on the NHS from 10 February and added: “This is an important milestone - especially as Paxlovid has been shown to reduce the risk of hospitalisation or death for vulnerable patients by 88%, meaning potentially thousands of lives could be saved.”

The American government has agreed to pay $5.29 billion (£3.95 billion) for 10 million courses of Paxlovid and the NHS has ordered 2.75 million courses. Barclays Equity Research estimates the drug could add between $15 billion and $25 billion to PFE’s global revenues this year.

Sad to say, PFE does not appear in the top 10 underlying assets of IBT or WWH, although your humble correspondent did invest 2% of my lifetime’s savings at $37 and $34 in January and February last year. They traded at $53 ex-dividend this week and PFE is now my fifth-most valuable holding, yielding just over 3% dividend income.

By contrast, Sven Borho and Trevor Polischuk, who have co-managed WWH since 2013 and 2015 respectively, have written to shareholders to say: “This past year has indeed been truly humbling. After a very successful 2020 despite the onset of a global pandemic, 2021 has been dramatically different.”

They went on to explain: “Our two key strategic overweights, specifically small-cap biotechnology and China healthcare, have been the most impacted. Additionally, the magnitude of the biotech drawdown has been record-setting in terms of duration and magnitude – in both absolute, minus 46%, and relative terms, minus 63%. The ‘Perfect Storm’ analogy has become overused, but it does apply here.”

I can’t resist sympathising with such a frank ‘mea culpa’ and, although I would rather have nothing to do with China, I am determined to hang on to WWH in the hope that Borho and Polischuk can return to form. So I bought a few more WWH at £29.95 last month. In particular, I note that WWH’s biggest holding is Merck (NYSE:MRK), another American pharmaceutical giant that has sold the NHS 2.23 million courses of another anti-viral pill, called Molnupiravir.

Similarly, IBT’s second and fourth-biggest underlying holdings, Gilead Sciences (NASDAQ:GILD) and Horizon Therapeutics (NASDAQ:HZNP), could prove catalysts for recovery and growth. However, its largest stake - accounting for more than 9% of assets - is described somewhat Delphically as “Unquoted Holdings”, and so remains an unknown factor. More positively, IBT delivers a dividend yield of 4.8% that pays investors to be patient.

Elsewhere in this sector, Polar Capital Global Healthcare (LSE:PCGH) tops the one-year table with a total return of nearly 14% and BB Healthcare (LSE:BBH) leads over five years with 88%. While PCGH offers the same nugatory yield as WWH of just 0.7%, BBH pays 3.7%.

BB Healthcare, managed by Paul Major, also doesn’t own Pfizer. Major explained in a recent interview with interactive investor why he has “no regrets” despite its strong share price since the start of the pandemic.

Let’s hope IBT and WWH don’t languish in the sickbay for too much longer, as both BBH and PCGH show healthier returns over the short- and medium-term. Any of these investment trusts could provide a shot in the arm for a diversified portfolio, as the world looks set to spend more on biotechnology and healthcare.

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

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

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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