Two investment trusts that have proved their worth
These two investment trusts have earned investors’ confidence since their flotations and remain solid bets, says Max King.
Many investors rightly adopted a wait-and-see attitude when Biopharma Credit (LSE: BPCR) raised $762m in its March 2017 flotation. The prospective return of 8%-9%, including a dividend yield of 6%, looked attractive, but how risky were its returns?
BPCR’s manager, Pharmakon, is a specialist lender to the life-sciences sector, having invested $4.7bn in 40 transactions over 12 years. This, Pharmakon says, is a $1.1trn industry growing at 6% per annum.
The loans to companies are “predominantly secured on approved, commercial-stage products” but the servicing and repayment of the loans is dependent on their success. An average rate of return in double figures implies a material risk of the products not selling.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Thirteen top investments
Pedro Gonzalez de Cosio, CEO of Pharmakon, says that companies have to move fast to capitalise on innovation by spending on research and development (R&D) now. They cannot afford to wait for the cash flow from existing products.
“It’s a race. We, however, are not taking clinical risk. For us, the risk is in projections of future sales from established products. Safety issues and product recalls are very rare and competition from new drugs is highly visible owing to the publication of trial results. With a team of 20, we have the expertise to do the necessary due diligence.”
Four years after flotation, BPCR has made 13 investments, four of which have been repaid with better-than-expected realised returns. The remaining nine are on course to generate annual returns between “high single-digits” and 12%.
A single company, Sarepta, comprises 25% of the portfolio, but it has a market value of $11bn including $1.9bn in cash. “It has $500m of sales at net margins over 70% from three products but has 20 more in the pipeline, so it is spending heavily on R&D.” A fifth of the portfolio is in cash but there is a “very attractive pipeline of deals for 2021”. In 2020, Pharmakon closed just three investments out of 243 screened, but four to six is more normal. The shares trade at $0.97, a 3% discount to net asset value (NAV), and yield 7%.
Another trust, launched in late 2016, that has proved itself is Civitas Social Housing (LSE: CSH). It trades at a 7% premium to NAV, yields 4.7% and has a market value above £700m. It invests in social housing, which it leases to housing associations on long-term, inflation-adjusted terms. These properties are for those in need of “supported living” owing to disabilities, mental-health issues or homelessness. There is a chronic shortage of supply of such accommodation yet local authorities are required to house those in need of it.
Firm foundations
Three housing associations account for 57% of CSH’s income and ten for 94%; 35% of CSH’s balance sheet is financed with low-cost debt but the rental yield of CSH’s portfolio is still around 5.5%, indexed to inflation.
This is expensive finance for housing associations, who have access to much cheaper loans from the public sector. Presumably, their rents are correspondingly elevated but these are paid by the local authority (and indirectly by the government) so they must still offer a good deal compared with the alternatives. CSH investors benefit from the inability or unwillingness of the public sector to drive down the cost of the social housing it is obliged to provide.
It is very hard to see how this could change; there is surely no political appetite to alter the financing structure of the provision of housing to those who can least afford it in order to save the government money. This makes CSH, like BPCR, an attractive long-term proposition for those seeking income plus a bit of capital gain.
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
-
Barclays warns of significant rise in social media investment scams
Investment scam victims are losing an average £14k, with 61% of those falling for one over social media. Here's how to spot one and keep your money safe
By Oojal Dhanjal Published
-
Over a thousand savings accounts now offer inflation-busting rates – how long will they stick around?
The rate of UK inflation slowed again in March, boosting the opportunity for savers to earn real returns on cash in the bank. But you will need to act fast to secure the best deals.
By Katie Williams Published
-
The industry at the heart of global technology
The semiconductor industry powers key trends such as artificial intelligence, says Rupert Hargreaves
By Rupert Hargreaves Published
-
Three emerging Asian markets to invest in
Professional investor Chetan Sehgal of Templeton Emerging Markets Investment Trust tells us where he’d put his money
By Chetan Sehgal Published
-
What to consider before investing in small-cap indexes
Small-cap index trackers show why your choice of benchmark can make a large difference to long-term returns
By Cris Sholto Heaton Published
-
Why space investments are the way to go for investors
Space investments will change our world beyond recognition, UK investors should take note
By Merryn Somerset Webb Published
-
Time to tap into Africa’s mobile money boom
Favourable demographics have put Africa on the path to growth when it comes to mobile money and digital banking
By Rupert Hargreaves Published
-
M&S is back in fashion: but how long can this success last?
M&S has exceeded expectations in the past few years, but can it keep up the momentum?
By Rupert Hargreaves Published
-
The end of China’s boom
Like the US, China too got fat on fake money. Now, China's doom is not far away.
By Bill Bonner Published
-
Magic mushrooms — an investment boom or doom?
Investing in these promising medical developments might see you embark on the trip of a lifetime.
By Bruce Packard Published