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
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
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.