A red hot trust for the brave

I made 2011 my year for pharmaceuticals. Perhaps you remember? I talked about a fantastic investment trust, Worldwide Healthcare Trust (Lon: WWH). And as the three-year chart shows, it’s not been a bad story so far…

Worldwide Healthcare Trust three-year performance

Worldwide Healthcare Trust three-year performance chart

I’ve plotted the performance of the trust (blue line) against the FTSE 100 (pink). As you can see, 2011 was pretty uninspiring, moving pretty much in line with the general market. But as we entered 2012, this pharmaceutical trust started to pull away. And more importantly, 2013 is looking pretty hot.

Many consider pharmaceuticals a pretty dull area of the market. But consider the fact that over the last three years, this pharma trust is up some 65% against the FTSE’s 20%. Maybe it’s not so boring after all?

And OK, my call was a little early. But the point I want to make is that I reckon the pharma sector is still red hot. To my mind, the recent outperformance is nothing more than the sector moving from hopelessly undervalued, to some semblance of normality.

But what isn’t yet priced in are some of the more exciting developments in any sector I’ve seen for many years.

Let’s take a look

Back in 2011 when I said I was going overweight pharma, some readers drew my attention to the well documented ‘patent cliff’ – that is, the industry-wide problem that key drugs were going off patent, leading to floods of copy-cat drugs and a destruction of the market.

And sure, that happened. In fact, the nadir came in 2012.

But the bigger point is that the pharmaceutical companies had been, and are pumping vast sums into research and development to find the next blockbuster drugs.

I’ve lifted this from the trust’s annual report: “2012 represented a clear inflection point in the pharmaceutical and biotechnology industries. Evidence of resurgence in research and development (“R&D”) productivity was the key. More positive late stage clinical trial read outs and product approvals were the hallmark metrics. A total of 40 new products were approved by the FDA in 2012, 10 more than in 2011. This is the most new approvals since 2004.”

The FDA (Food and Drug Administration) is the key US drugs regulator. If you get their approval for a drug, then you’re cooking. So, I’m looking forward to a fresh impetus from new drug approvals. But more than the number of drugs on the market, we’re also witnessing a growing market for pharmaceuticals.

At home, there’s an increasing army of elderly and infirm. In the emerging markets, we see not only a growing population, but more importantly, a population increasingly able to afford the therapies on offer.

According to the fund manager, 34% of big-pharma sales are now to the emerging markets. Not only that, but the fund has also increased its stake in directly held emerging stocks from 8% in 2011 to 11% in 2012.

Regular readers will know that I’m a keen advocate of the emerging markets. The success of this fund shows you exactly why.

The next great era approaches

As well as the traditional pharmaceutical side of things, there’s another reason to be bullish on healthcare. And that is the fantastic opportunities offered in biotechnology and gene sequencing. Take gene sequencing. As my colleague David Thornton pointed out last week, the sequencing of the genome created many controversies and not a few blind alleys for investors.

But the power to sequence our genes quickly and cheaply opens up the field of preventive medicine – if we can identify a genetic mutation in a specific person that is associated with developing a particular cancer for example, then we can take pre-emptive action.

That heralds a new market for drug stocks. But it will also require a great deal of investment in sequencing technology. David had an interesting play on that in Penny Sleuth last week.

The point is that the fantastic volume of work put in (and money spent) is only just starting to provide the building blocks for clinical applications. Over recent years many businesses have gone to the wall. But the successful ones have been merged and taken over, creating an industry with enough clout to actually bring treatments to market. This could be very, very exciting.

And yet, many big pharma stocks are still in a depression. Like I said at the start, this game is all about timing.

To my mind, this investment trust is ripe for the picking. Yes, if you didn’t buy when I originally talked about it, you’ve missed out on some decent gains. But don’t let that put you off.

Of course, all the normal risk warnings apply – the stock market is not a one-way bet. But more than that, this investment trust applies 20% gearing. That means, you should see an outperformance if things are going well (as they have been), but should the market turn, this trust is likely to fall harder and faster.

Also bear in mind, that gene therapy and biotechnology are pioneering industries. That offers risk as well as reward. Though perhaps, one way to combat these risks is to invest in a pooled fund – like this one.

If you want to find out more information, you can download the August factsheet here. In it you’ll find sector breakdowns, geographic breakdowns and performance statistics.