We think Biotech Growth Trust (BIOG) is a strong choice for investors looking for a dedicated sector fund.
Firstly, it has a strong management team whose depth of knowledge and experience in this sector is one of the best, in our view. Manager Richard D. Klemm brings industry as well as investment experience, having completed extensive studies in molecular biology, molecular and cell biology and economics. He graduated in 2000 and joined OrbiMed as a biotechnology analyst the same year. Comanager Geoffrey C. Hsu joined OrbiMed in 2002, having previously worked as an analyst in the health-care investment banking group at Lehman Brothers.
The duo can further leverage a well-resourced team of more than 50 investment analysts. The team brings a mix of background from both investment and industry; in addition, the group’s private equity and venture capital investment arm also adds insight that benefits the investment process.
Indeed, the process is another reason for our high conviction. It is thorough, bottom-up and emphasises investments in companies with underappreciated products in the pipeline, high-quality management teams, and adequate financial resources. The fund’s investment universe comprises some 600 companies, of which around two thirds are followed actively by analysts, with names with the most attractive investment case covered intensively through detailed business forecasts and research.
The process has translated into excellent risk-adjusted returns. Since OrbiMed’s appointment in May 2005 to 31 August, the fund has returned over 21% annualized, beating its category peers and its benchmark by a healthy margin. Investors should, however, be fully aware that a sector fund, particularly one focused on such a narrow industry as biotechnology, has the potential to be highly volatile. The managers’ high-conviction approach and use of gearing can exacerbate that further. However, compared with peers, Klemm and Hsu have used that risk well and the fund’s Morningstar Risk rating over three- and five-year periods is only average.
Finally, we like the fact the board brings much in the way of industry experience to the table, combined with investment experience. We think a specialist mandate such as this needs a certain level of understanding that can best be gained in the field. They have also given shareholders very clear guidance on how they will manage both the discount and premium and have acted in the market to keep the discount below their 6% target.
The fee structure could be improved, though. Granted, the base management fee is competitive, but we think the performance fee has some flaws. While we like the provisions in place that act as a high-water mark, the percentage fee is high and we don’t like the fact that it’s calculated quarterly as that could encourage short-termism.
That aside, for investors wanting long-term exposure to biotechnology, we think this is an excellent offering. The fund receives our Silver Rating.
