Feeling a bit peaky? Then perhaps a dose of the Worldwide Healthcare Trust might help banish some of the symptoms. This investment trust, valued by the stock market at £1.3 billion, takes positions in every conceivable type of healthcare company, from pharmaceuticals and biotechnology to medical equipment suppliers. What it’s not, though, is an indirect way to take exposure to “Big Pharma” companies such as Astrazeneca and Glaxosmithkline. Almost the opposite, in fact.
The Worldwide Healthcare Trust was launched in 1995 as the Finsbury Worldwide Pharmaceutical Trust, changing its name in 2010 to take account of its widened investment remit to include companies that provide healthcare equipment, technology and other services.
It has been managed all along by Orbimed Capital, the world’s biggest dedicated healthcare investment group with a total portfolio of more than $13 billion.
The trust’s main aim is to generate capital growth for its shareholders. Because its preference is to reinvest returns, its dividend payments tend to be pretty meagre, giving the shares a yield of just 0.69 per cent. Its benchmark is the MSCI World Health Care Index, against which its performance has been solid over the long term but more patchy if looked at in single-year snapshots.
It’s tempting to conclude that the trust is using the wrong benchmark, as in many ways its holdings represent a big counter-bet to the composition of the index. For example, about 16 per cent of the portfolio is invested in Big Pharma, a collective of the world’s most established drugs producers that also includes companies such as Pfizer, Roche and Sanofi. Yet these companies represent about 40 per of the MSCI index, meaning the trust is very underweight in some of its core constituents. Similarly, about 17 per cent of the trust backs biotech companies in the emerging markets, a more volatile but also potentially more rewarding sector, as against just 2.3 per cent of the index. And where healthcare services companies account for about 13.4 per cent of the index, they amount to just 4.9 per cent of the Worldwide Healthcare Trust’s portfolio.
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This is not just about percentages. What it tells us is that the investment manager is placing a large bet that, ultimately, a crop of the world’s emerging biotech companies will eventually replace the incumbent drug producers. This is perfectly conceivable, but it is a much riskier investment proposition.
It helps to explain why, in a healthcare sector that is already volatile, the Worldwide Healthcare Trust’s returns fluctuate. While it undershot the index in 2018, it sharply outperformed it the previous year. As of the end of March, it was way ahead, with an increase in its net asset value of 15.2 per cent against 6.1 per cent for its benchmark. Assessed over the period since its creation in 1995, it has generated a respectable annualised return of 15.7 per cent.
It is by no means suited to all investors. Those seeking income will rightly steer clear, while those looking for a predictable short-term gain should also stay away.
For those thinking longer term, however, it is attractively positioned to benefit from the gradual increase in the world’s ageing population and the structural rise in private healthcare provision. There are a sufficient number of mature businesses in the portfolio, which has a total of about 69 holdings, to prevent it being an overly concentrated high-risk play.
The shares were down 25p, or 1 per cent, to £24.95 yesterday but have increased in value by more than 1,390 per cent over the past 20 years and have almost doubled in the past five. Worth holding for the long run.
ADVICE Long-term hold
WHY Well-crafted portfolio should generate substantial capital growth over time
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Morgan Advanced Materials
Morgan Advanced Materials is one of those companies whose history evokes memories of Britain’s bygone industrial age. Its continued existence underscores how it — and companies like it — have had to adapt in order to survive.
The company began life in 1856 as the Patent Plumbago Crucible Company, making graphite crucibles for molten metals furnaces at a factory in Battersea, south London.
Renamed Morgan Crucible in 1881 and listed on the stock market in 1890, it changed its moniker again in 2013 to reflect its move into higher-precision industrial materials. By that time, making crucibles accounted for only 5 per cent of its business.
The modern Morgan Advanced Materials operates two divisions: thermal, which includes highly heat-resistent ceramics, and carbon and technical ceramics, which also contains seals and bearings.
Its products serve customers in a variety of sectors, from healthcare and petrochemicals to electronics, energy and security. This diversity makes it attractive.
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Since 2016 the group has prioritised six objectives. These include operating more effectively as a global company, with larger sites, increasing its spending on research and development and making its sales processes more efficient.
As part of a plan to stimulate growth, which was lagging behind its markets, it has increased its spending on R&D by £10 million a year and sold its composite and defence systems division, which made body armour and military vehicles, to management.
The company’s aims seem intelligent, though it will take time for keener research efforts to yield rewards. Stripping out the effects of currency movements, its growth — revenues up 7.4 per cent to just over £1 billion last year — is already none too shoddy, though disposals cut pre-tax profits last year by just over 30 per cent to £94.9 million.
The shares, off 1¾p, or 0.7 per cent, to 257p yesterday, have in recent months lost a lot of the gains made since the priorities were set, for little obvious reason. Trading at just 9.2 times Stifel’s forecast earnings for a yield of 4.3 per cent, they look like an opportunity.
ADVICE Buy
WHY Price ignores its diversity and growth potential