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Beware dividend dangers, warns BB Healthcare

Paul Major, manager of the BB Healthcare (BBH) investment trust, is enthusiastic about the buying opportunities in biotech and pharmaceutical companies created by US political pressure.

Major believes US government action on drug prices is unlikely and is eyeing the 'interesting opportunity' fears over a clampdown have sparked.

BB Healthcare is currently raising fresh money from investors, having launched last December with £150 million. The trust yields 3% but the vast bulk of that comes from capital. 

Major warned on the pitfalls of adopting an income approach to healthcare investing, particularly in the UK stock market.

Can't watch now? Read the transcript

Daniel Grote: Today I’m joined by Paul Major who is manager of the BB Healthcare investment trust. Paul, thanks for joining us.

Paul Major: Good morning Dan.

DG: So the investment trust that you run, it launched towards the end of last year, raised around £150 million, there’s been another £50 million that you have raised along the way and now you’re looking to gather even more money.

I guess with the healthcare sector still operating under a bit of a cloud, with the US president tweeting fairly often about wanting to bring drug prices down, many investors might be a bit wary of entering the sector, so why are you trying to raise more money now?

PM: Well you raise a good point there, I think you’re right. When we were initially raising money for the IPO, there certainly was a proportion of investors who felt that the lack of clarity over the direction of reform in the US and some of the stuff around drug pricing was too unclear to be invested in and we’re at a point some nine months later where I think we have a little bit of clarity.

DG: And on drug pricing, you’ve had a fairly combative message coming from the president but it seems that in terms of the legislation, I mean there hasn’t been any yet, but if there is to be some, it looks like it won’t be as punitive as the rhetoric has suggested.

PM: I think one has to gain look at the broader context. So there was definitely a competitive tweeting fest about drug prices between Hillary Clinton and Bernie Saunders in the democratic primary. I think the reality, what people have to remember is, outside of the veterans’ programme which is for retired services personnel, that the US government does not really get involved in the direct purchasing of drugs or the setting of prices.

Now there have been various attempts at bills to address that, or change that in some way. But they’ve never garnered meaningful support and that government interference in a commercial enterprise is very much anathema to the majority of Republicans. So as long as they have control of the three branches of government, I think that’s very, very unlikely.

This whole issue around drug pricing has created an interesting opportunity from a valuation standpoint. When we look at valuations of particularly the large cap biotech stocks in the US, I think partly because of concern over drug pricing and the perception that, you know, biotech has higher average pricing and therefore is maybe a little bit more at risk and partly because historically it’s been a little bit of a tech proxy and now, of course, everyone wants to own the software and hardware companies, the real thing rather than the proxy, the sector has sort has sort of fallen out of favour and you’ve had rotation out of biotech into other areas.

DG: And on that point, I guess the clouds may be lifting a bit around drug pricing but as you say it doesn’t seem yet to have encouraged non-specialist investors back into the sector, there is still that worry over the political pressure.

PM: Well exactly. So I guess the question there is we’re not going to have another presidential election cycle for several years. We are going to have the mid-terms come up and then potentially that means that the Republicans may lose control of all the branches of Congress, but as long as you have a Republican president who has to sign any bills I think the likelihood of any legislation coming through is very low.

DG: And you mentioned the attractions of the US for healthcare. I mean the flipside of that is the UK makes up quite a small proportion of the fund and the stocks that UK investors will associate with healthcare, GlaxoSmithKline isn’t in there, AstraZeneca was but isn’t any more, why is that?

PM: Well we have increased our exposure to Shire given the extent to which it’s fallen and I think that one’s a very interesting case right now. The UK is a challenge, and I come from an academic background in the UK, we have some of the best academic institutions when it comes to life sciences in the world, I think that’s indisputable. What I think we’re not good at as a society and the Americans are much better at, is taking those academic ideas and being patient and willing to fund them at relatively high levels of risk through to becoming viable commercial prospects at the cutting edge of innovation in healthcare.

And the other aspect of investing in UK healthcare is the challenge of how you, if you’re an income-sensitive investor, how do you create an exposure that actually gives you, both a total return and an income component. If you look at the total return potential of the sectors, or sub-sectors of healthcare, or the companies that have high dividend yields, they tend to be quite low, and you don’t need me to tell you that if you look at the total return you’ve seen from the likes of a GlaxoSmithKline over the last five-to-10 years, it’s not been very good.

DG: Because the trust is yielding around 2.9% and that’s predominantly paid from capital…

PM: Almost entirely from capital, yes that’s right.

DG: So if you weren’t to do that, if you were paying from income, you’d feel overly constrained in the sort of stocks that you’d have to buy.

PM: I think if we tried to pursue an… so our philosophy is very much a total return philosophy. The strategy that we’re pursuing, the companies that we want to invest in that we think are the best ones for the next three-to-five years across a diversified healthcare platform, they are simply not going to pay you a reasonable amount of income.

DG: Well Paul, thanks a lot for your time.

PM: A pleasure, thank you.

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