Ian Cowie: why ‘doing good’ has paid off over the past 25 years

This trust has returned 3,961% since the summer of 1995 and there are sound reasons sustained outperformance will continue in the years ahead.

Never mind short-term noise about share price volatility over a few months or years. New research exclusively commissioned for interactive investor names the best investment trusts over the last quarter century - that’s a working lifetime for many shareholders.

The top-performing investment trust, focused on the stock market during the 25 years since it launched, shows how shareholders can do well by doing good. 

According to research by the Association of Investment Companies (AIC), the accolade for a quarter century of outperformance is held by the £2 billion blue-chip Worldwide Healthcare (LSE:WWH).

While the coronavirus crisis is bad for most forms of business, it is an ill wind that blows some good for shares in the Biotechnology and Healthcare sector. WWH is one of the biggest backers of medical research, including the search for a Covid-19 vaccine, in the investment trust sector with 39% of its underlying assets allocated to biotechnology, plus 29% in pharmaceuticals.

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Shareholders - including your humble correspondent - who may know next to nothing about epidemiology can pay annual ongoing charges of 0.88% to gain access to a professionally managed global portfolio of biotech and pharma stocks. WWH’s top 10 underlying holdings include America’s Alexion Pharmaceuticals (NASDAQ:ALXN) and Merck (NYSE:MRK), Japan’s Takeda Pharmaceutical (NYSE:TAK) and Switzerland’s Novartis AG (NYSE:NVS).

According to independent statisticians Morningstar via the AIC, in the quarter century since WWH shares began trading in the summer of 1995, this trust has delivered total returns of 3,961%. HgCapital Trust (LSE:HGT) did even better over this period with a total return of 4,547% by focusing outside the stock market with a portfolio of unlisted securities.

The other investment trusts that make up the top 10 and that focused on the stock market over the last 25 years are: Rights & Issues (LSE:RIII) in the UK Smaller Companies sector with a total return of 3,522%; Scottish Mortgage (LSE:SMT) in the Global sector with 2,832%; TR Property (LSE:TRY) in Property Securities with 2,400%; JPMorgan European Smaller Companies (LSE:JESC) in European Smaller Companies with 2,273%;Henderson EuroTrust (LSE:HNE) in Europe with 2,244%; Fidelity European Values (LSE:FEV) also in Europe with 2,178%; Herald (LSE:HRI) in Global Smaller Companies with 1,978%; ICG Enterprise (LSE:ICGT) in Private Equity with 1,667% and Canadian General Investments (LSE:CGI) in North America with 1,666%.

Interestingly, for investors keen to do well by doing good, the AIC calculates that average returns from the seven investment trusts in its biotech and pharma sector beat the average returns from all conventional investment trusts - that is, excluding Venture Capital Trusts (VCTs) - over all the periods it measured. So, over the last one, five, 10 and 20-year periods, the average returns from conventional trusts were -1.6%; 44%; 162% and 337%, respectively. But the average returns from the biotech and pharma sector were 12%, 68%, 489% and 470%.

Better still, WWH’s comparable returns were 20%, 77%, 495% and 723%. That tallies with my personal experience since I became a shareholder in WWH in the early Noughties. The trust trades at a modest premium to its net asset value (NAV) of 0.6%.

Sven Borho has been one of the fund managers of WWH since its launch in the summer of 1995 and is a founder of its management company OrbiMed Healthcare. Borho’s joint fund manager, Trevor Polischuk, joined OrbiMed in 2003. A substantial team supports those two. OrbiMed has 11 regional offices and more than 100 investment professionals, of whom 30 hold PhD or medical doctorate qualifications and 15 are former chief executives or company founders. This specialist fund manager has total assets of $13 billion (£10 billion). 

Mel Jenner at Edison Investment Research argues there are reasons to expect sustained outperformance. She said: “Healthcare stocks have performed better than the global market over the long term and, due to a favourable industry backdrop, there is potential for this to continue.

“Demand is robust, innovation is at an elevated level, until very recently the political environment has been more benign and there could be an acceleration in M&A, which should be supportive for the sector’s performance.”

Similarly, Annabel Brodie-Smith, a director of the AIC, told me: “Investment companies in the biotechnology and healthcare sector have been amongst the strongest performers so far in 2020.

“The demand for treatments to combat Covid-19, and now the production of vaccines, has been a huge contributor, but there are structural themes underpinning the sector’s growth too.”

These include the sad fact that longer lifespans are often accompanied by prolonged periods of frailty. In plain English, older people may need more medical care than younger ones.

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So, as the global population becomes older and wealthier, expenditure on healthcare is likely to continue rising. While all eyes are on the coronavirus crisis at present, ongoing research to find cures or palliatives for Alzheimer’s disease and cystic fibrosis among other ailments will also drive asset allocation.

Against all that, pharmaceutical pricing is likely to become a focus for political controversy in the months running up to the US presidential election on 3 November. “Big Pharma” rarely gets a good press and claptrap-seeking politicians may see it as an easy target.

But the pandemic panic might have one unexpected positive effect. It could remind voters that it won’t be a politician who finds a cure for Covid-19; that challenge will have to be faced by pharmaceutical companies backed by WWH and other biotech and healthcare trusts.

Ian Cowie is a shareholder in WWH and RII among a global portfolio of investment trusts and other shares.

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

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.