A re­silient trust with a 6.7pc yield? Buy now while the pre­mium is min­i­mal

Bio­Pharma Credit op­er­ates in a prof­itable niche that al­lows it to com­bine high in­come with rel­a­tive safety

The Daily Telegraph - Business - - Business - Richard Evans

WE MAKE one of our rare for­ays into pre­mium ter­ri­tory this week. Nor­mally this col­umn seeks to live up to its name by fo­cus­ing on trusts that trade at a dis­count, but oc­ca­sion­ally we think it is jus­ti­fi­able to pay a small pre­mium. As re­cently as a month ago shares in the trust we have in mind, Bio­Pharma Credit, were trad­ing at 6.8pc above its net as­set value per share. But the re­cent sell-off in the stock mar­ket has caused the pre­mium to shrink to a more palat­able 3pc.

The most ob­vi­ous at­trac­tion of the fund, which lends money to life sciences com­pa­nies at rel­a­tively high in­ter­est rates, is its 6.7pc yield, but it of­fers fur­ther ben­e­fits. “We ex­pect re­turns to have a very low cor­re­la­tion with other in­vest­ments, along with rel­a­tively low volatil­ity,” said Alan Bri­er­ley, an in­vest­ment trust an­a­lyst at Canac­cord Ge­nu­ity, the bro­ker. He said the port­fo­lio’s de­fen­sive qual­i­ties “could have sig­nif­i­cant value in more chal­leng­ing [mar­ket] con­di­tions”. Part of the fund’s re­silience stems from the fact that the cash flows used to pay in­ter­est on the loans it makes de­rive from sales of drugs and other med­i­cal prod­ucts that have been com­mer­cially ap­proved and made avail­able to pa­tients – “in­vest­ments with long-dated in­tel­lec­tual prop­erty pro­tec­tion”, Bri­er­ley said. But the ex­pe­ri­ence and skill of the man­age­ment team at Phar­makon Ad­vi­sors are also im­por­tant.

“The man­agers are highly ex­pe­ri­enced and can demon­strate an im­pres­sive track record; the un­lev­ered weighted av­er­age an­nu­alised net re­turn is 10pc and there have been no de­faults [on loans in any of their funds],” Bri­er­ley added.

The trust, whose shares trade in dol­lars, tar­gets an an­nual to­tal re­turn of 8pc-9pc, in­clud­ing the tar­get yield of 7pc at the flota­tion price. Such a high in­come at a time of his­tor­i­cally low in­ter­est rates is strik­ing and the rea­son for it owes much to the spe­cialised niche in which the trust op­er­ates.

The fund is able to charge rates of 9pc-12pc on its loans. Nor­mally such high rates would ring alarm bells be­cause they would be a sign of el­e­vated risk. But the fast-grow­ing life sciences firms that bor­row from the trust are pre­pared to pay them be­cause it is ul­ti­mately cheaper for their share­hold­ers than is­su­ing new shares, which would di­lute ex­ist­ing hold­ings.

In fact the loans are very safe in­deed, as the ab­sence of de­faults shows. The trust is one of the 17 in Canac­cord’s model port­fo­lio. Also re­as­sur­ing are the per­sonal stakes of Pablo Le­gor­reta, a prin­ci­pal at Phar­makon Ad­vi­sors, who owns 76.7m shares, and sev­eral board mem­bers.

Questor says: buy

Ticker: BPCR

Share price at close: $1.05

Up­date: Twen­tyFour In­come

Questor tipped Twen­tyFour In­come, an­other bond fund with a high yield, in March and we main­tain our pos­i­tive view. But any reader who wants to buy it now via Bri­tain’s big­gest stock­bro­ker, Har­g­reaves Lans­down, faces a prob­lem: the trust has been cat­e­gorised as “ap­pro­pri­ate for pro­fes­sional in­vestors or pro­fes­sion­ally ad­vised re­tail in­vestors” and or­di­nary pri­vate savers can no longer buy its shares at Har­g­reaves.

If you call the bro­ker’s helpline you can ask to be emailed a form that al­lows you to “self-cer­tify” that you have the req­ui­site ex­pe­ri­ence as an in­vestor to buy the trust. The cri­te­ria are quite strict and Questor sus­pects that rel­a­tively few read­ers would qual­ify if they an­swered the ques­tions with scrupu­lous ac­cu­racy.

Har­g­reaves said it had not taken the de­ci­sion to re­strict avail­abil­ity of the trust it­self but had re­acted to guid­ance from Twen­tyFour As­set Man­age­ment, the trust’s man­ager. But Twen­tyFour told Questor that there had been a mis­un­der­stand­ing and that the trust was in­tended to be avail­able to or­di­nary pri­vate in­vestors.

It said the rel­e­vant doc­u­men­ta­tion would be clar­i­fied and that the fund should be made avail­able again to Har­g­reaves’ cus­tomers in the nor­mal way by the end of the month.

The restric­tion also ap­plies cur­rently to the Twen­tyFour Se­lect Monthly In­come trust. Questor found both avail­able freely at AJ Bell Youin­vest; other bro­kers may be in the same po­si­tion. The ul­ti­mate ori­gin of the new red tape is EU leg­is­la­tion called “Mi­fid II”. Questor hopes that it does not lead to more in­con­ve­niences of this type.

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