Should you put money in biotech?

The Daily Telegraph - Your Money - - FRONT PAGE - Laura Suter

Biotech­nol­ogy is a buzz­word that has been ex­cit­ing in­vestors for decades, but while some have mul­ti­plied their money many times over, oth­ers have suf­fered painful losses. Be­tween 2015 and 2016 the en­tire sec­tor fell heav­ily, thanks to con­cerns about the prospect of a more dra­co­nian US ap­proach to drug price reg­u­la­tion.

From July 2015 to the fol­low­ing Fe­bru­ary, the US-fo­cused Nas­daq Biotech­nol­ogy index fell by more than 30pc and the MSCI World Biotech­nol­ogy index by 20pc. Some in­di­vid­ual funds fell even more heav­ily.

The sec­tor has now re­cov­ered and ex­cite­ment is build­ing once more – but should in­vestors pay at­ten­tion?

Biotech com­pa­nies are mainly in­volved in de­vel­op­ing new drug treat­ments, tests and other med­i­cal tech­nolo­gies. The sec­tor is no­to­ri­ously volatile, in large part be­cause in­vestors are of­ten bank­ing on a firm’s lat­est drug or treat­ment re­ceiv­ing regulatory ap­proval, where the chances of suc­cess are low.

In­di­vid­ual com­pa­nies can, and do, go bust or suf­fer huge share price falls, and the sec­tor is heav­ily sen­si­tive to the ac­tions of reg­u­la­tors.

For in­stance, biotech com­pany Prothena – the top hold­ing in famed investor Neil Wood­ford’s Pa­tient Cap­i­tal trust – has re­cently come un­der at­tack from an Amer­i­can hedge fund, which is bet­ting against the stock as it ex­pects its flag­ship drug to fail. The shares fell by 9pc when the as­sault be­came pub­lic.

Gary Pot­ter, a multi-as­set man­ager at F&C, the in­vest­ment firm, said he had never in­vested in biotech. “On a risk scale of one to 10, biotech has to come in at a nine or a 10. You could lose 50pc in a bad mar­ket – peo­ple have done, and will do again. It’s an easy story to sell, and I’ve heard it for 20 years,” he said. “The chance of suc­cess is there, but there’s a big health warn­ing.”

How­ever, a com­pany that gains ap­proval for a new treat­ment can de­liver spec­tac­u­lar re­turns, and many long-term in­vestors have been hand­somely rewarded. Over the past 10 years the to­tal re­turn of the MSCI index has been 560pc, while the NAS­DAQ index has re­turned 530pc.

Peter Hughes, a health­care an­a­lyst at Axa In­vest­ment Man­agers, said that at the point com­pa­nies be­came avail­able for pub­lic in­vest­ment they were typ­i­cally at the “devel­op­ment” stage, which comes af­ter the ini­tial dis­cov­ery be­hind a new drug.

“Only one in ev­ery 10 drugs that reaches the first stage of clin­i­cal tri­als gets ap­proved, so the at­tri­tion rate is still high,” he said.

A “gen­er­al­ist” fund that has de­cent ex­po­sure to biotech firms is likely to be the best op­tion for most in­vestors.

Philippa Gee, of Philippa Gee Wealth Man­age­ment, said: “This is such a niche sec­tor, you need to be pre­pared to time both when you go in and when its money in biotech, with the rest in grow­ing tech­nol­ogy busi­nesses and en­ergy ser­vices. It costs 1.14pc a year.

A gen­eral health­care fund, which can in­vest in hos­pi­tals, phar­ma­ceu­ti­cal com­pa­nies, biotech firms and more, of­fers a more tar­geted op­tion. Top picks in­clude Axa Fram­ling­ton Health and the World­wide Health­care in­vest­ment trust, which cost 0.82pc and 0.9pc re­spec­tively.

Ryan Hughes, head of fund se­lec­tion at the in­vest­ment shop AJ Bell, said Axa’s fund of­fered broad ex­po­sure to large phar­ma­ceu­ti­cal com­pa­nies along­side smaller biotech firms, while World­wide Health­care is a higher-risk op­tion, as the trust bor­rows money in an at­tempt to en­hance re­turns.

For those who would rather in­vest via a tracker fund, L&G’s Global Health­care & Phar­ma­ceu­ti­cal tracker fol­lows a FTSE index of health firms for an an­nual charge of 0.31pc.

There are a num­ber of spe­cific biotech funds for those who do want di­rect ex­po­sure. The Biotech Growth Trust is in our Tele­graph 25 list of favourite funds and charges 1.1pc. Axa, Po­lar Cap­i­tal and Pictet all of­fer ope­nended biotech funds.

Al­ter­na­tively, you could in­vest in the Nas­daq Biotech­nol­ogy index via the US-listed iShares Nas­daq Biotech­nol­ogy ETF for a charge of 0.47pc a year.

In­vestors are in­creas­ingly wary of stock mar­kets, with many dump­ing their UK shares and shel­ter­ing in more cau­tious in­vest­ments, such as bonds.

Ac­cord­ing to fig­ures from the In­vest­ment As­so­ci­a­tion, a trade body, Septem­ber was a record month for in­vest­ments, with in­vestors putting £5.6bn into funds. It con­tin­ues a record-break­ing year, with in­vestors putting £33.7bn into funds in the first nine months of 2017 – the high­est amount ever.

How­ever, the fig­ures also re­veal that in­vestors are sell­ing out of funds in­vested in the shares of Bri­tish com­pa­nies, with £103m pulled in Septem­ber alone – a trend that has been seen all year.

In­stead, they are shel­ter­ing in bond funds, with £4.9bn put into them in Septem­ber – ac­count­ing for the lion’s share of the inflows.

Of that, £2.3bn was put into “strate­gic” bond funds, which hand the re­spon­si­bil­ity of pick­ing be­tween dif­fer­ent bonds to the fund man­agers.

Laith Kha­laf, of Har­g­reaves Lans­down, the fund shop, said: “Sales of bond funds have picked up sig­nif­i­cantly over the sum­mer months, which is bizarre given the height­ened ex­pec­ta­tions of ris­ing in­ter­est rates over this pe­riod.

“Much of this money has flowed into strate­gic bond funds, which in the­ory have the flex­i­bil­ity to shel­ter in­vestors from the worst rav­ages of ris­ing rates on fixed in­come prices, if the man­ager makes the right calls.”

Ja­son Hol­lands, of bro­ker Til­ney Bestin­vest, said in­vestors are wary about the UK stock mar­ket.

“There is grow­ing scep­ti­cism about how much longer this bull mar­ket can con­tinue,” he said.

He put this down to con­cerns about Brexit, a frag­ile Gov­ern­ment and the ris­ing pop­u­lar­ity of the Labour Party. The rest of in­vestors’ money in Septem­ber went to funds in­vest­ing in Europe, America and global stock mar­kets.

Biotech­nol­ogy of­fers the prospect of both huge gains and painful losses. How can you get ex­po­sure while keep­ing risks to a min­i­mum? James Con­ning­ton of­fers some op­tions ‘The chance of suc­cess is there, but there’s a big health warn­ing’

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