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BB Healthcare Trust gunning to stay in good health

The Times

Since raising £140 million at its launch in December 2016, BB Healthcare Trust has had a solid start. The actively managed fund, run by Bellevue Asset Management, has returned 17 per cent and aims to pay a dividend of 3.5 per cent in its first full year since listing on the London Stock Exchange.

With a market capitalisation of £230 million, it is returning to the market to raise fresh funds by issuing up to 150 million further shares via intermediaries. So should retail investors consider seizing the opportunity to tuck in a few more?

With a portfolio of up to 35 “high-conviction” investment ideas, and a three to five years investment horizon, BB is a decent way to gain exposure to the sector.

The macroeconomic case for investing in healthcare stocks is easy enough to understand. A combination of ageing populations, rising incomes in developing countries such as India and China and the global spread of “lifestyle” issues such as diabetes and obesity point to steady growth in healthcare spending for the foreseeable future.

It is expected to rise 4.3 per cent annually, from just over $7 trillion in 2015 to $8.7 trillion by 2020. But stock picking, especially in the research-based pharmaceutical industry, can be tricky, best left to experts with a good grip on the science and legal complexities of international drug patent law.

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BB, managed by a team based in London and Switzerland, tends to avoid the big, mature pharma groups such as Glaxosmithkline and Astrazeneca, which it believes have limited scope for growth. Instead it focuses mainly on small and mid-sized companies, which it believes have greater potential, spanning everything from manufacturers of medical devices such as Align Technology and Intuitive Surgical, a maker of equipment used in robotic surgery. Its portfolio also includes retailers such as Walgreen Boots Alliance and some more established drugmakers such as Amgen, the US biotechnology group, and Eli Lilly.

The fund builds on the expertise acquired by Bellevue with BB Biotech, the largest European biotech investment trust with more than $3 billion under management.

With a flat fee of 0.95 per cent, BB isn’t a particularly cheap way to access the healthcare sector. In fact, healthcare index trackers are available that might offer a lower cost alternative. and with the NAV per share at 111p and the share price at 115p, the fund is trading at a slight premium to net assets. In its favour, however, the fund has an attractive pay structure as far as investors are concerned, with directors including fund managers Paul Major and Daniel Koller remunerated in shares, rather than cash. So there is an unequivocal incentive to deliver above-average performance.

For those with a medium to long-term investment horizon and keen to gain access to the healthcare industry, traditionally regarded as one of the more defensive sectors during a market downturn, BB offers a compelling proposition. However, the risks should not be understated.

Although the broad healthcare story is hard to argue with, big regulatory risks remain for individual companies. Moreover, the smaller firms in which the fund focuses are inherently riskier than more diversified groups because of their vulnerability to a relatively small number of products, contracts or developmental drugs and devices.

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The limited number of companies in which the fund buys shares means this is a potentially more volatile vehicle than alternatives. Nevertheless, for those comfortable with these risks, BB Healthcare offers an attractive investment.
MY ADVICE Buy
WHY Proven team with good pedigree. For those happy with the risks, the fund is a good way to gain exposure to the healthcare sector

Finsbury Foods
If you want to sell cakes, a range branded with the name of Mary Berry is not a bad start. Having struck a deal with the grand dame of baking late last year, Finsbury Foods said yesterday that sales had exceeded expectations, and that a further multi-year agreement meant the former Great British Bake Off star would continue to front its products.

In a challenging market for food producers struggling with higher input costs resulting from the Brexit vote and wider uncertainty, Finsbury Foods has continued to put in a steady performance. Monday’s preliminary results showed flat
like-for-like revenues of £314 million, and adjusted pre-tax profits were up 5.6 per cent at £16.6 million.

With little excitement of late, Finsbury shares have been unloved among investors and its stock has lost a little over a quarter of its value in the past 12 months, putting its enterprise value at only ten times its earnings against a sector that trades at levels closer to 15 times.

This underwhelming valuation points to potential for considerable upside in the shares if the company’s ambitious growth plans start bearing fruit. For a second year in a row, Finsbury has pumped record capital into its business, spending £12.5 million over the year to the start of July on upgrades including a new IT system, cake line and artisanal bread-making facility.

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The investment is expected to improve efficiency as well as capability at a business that almost doubled earnings and revenues in the previous three years through acquisitions.

The company been not shy in admitting when spending has gone awry. Grain D’Or, its premium baked goods site in London, is scheduled for closure with the loss of 250 jobs after failing to make a profit. Even with this impairment and higher investment spending, Finsbury has continued to reduce its net debt, which fell 11.4 per cent in the past year to £17.5 million. Its final dividend rose to 2p, taking the full-year dividend to 3p, up 7.1 per cent.

Take all this together and Finsbury Foods looks well positioned for growth, coming with a valuation that has yet to reflect its enhanced underlying earnings capability.
MY ADVICE Buy
WHY Record investment and further acquisitions point to record earnings

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