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Investment Trust Watch: cancer fund battles discount

Syncona, the former Battle Against Cancer Investment Trust, falls to a discount as investors adjust to decision to fight disease more directly.

 
Investment Trust Watch: cancer fund battles discount

Has Syncona (SYNC ) got a fight on its hands to win back investors as its shares slip to a discount? Or is stock in the former Battle Against Cancer investment trust just drifting as it gradually transforms into a one of the country’s biggest life science funds?

Three months after Bacit surprised the City with plans to abandon its fund of funds structure and join forces with Wellcome Trust and Cancer Research UK, its shares have dropped to a 2% discount below net asset value.

Given that in the past year the shares have traded at an average premium of nearly 3% above NAV that gives it a Z-score of -1.6, making it the fourth cheapest trust in our weekly table from Numis Securities (see below).

Just to recap, a Z-score is a measure used by analysts to tell if an investment trust share is trading beyond its normal one-year range. Broadly, a Z-score of -2 or below is considered cheap, while a score of 2 or more is viewed as getting expensive.

'Cheap' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
Drum Income Plus REIT (DRIP)  4.8 11.4 -2.5
Perpetual Income & Growth (PLI)  -9.6 -5.8 -1.8
Qannas Investments (QIL)  -3.6 0.4 -1.7
Syncona (SYNC)  -2.1 2.7 -1.6
JPMorgan Mid Cap (JMF)  -11.9 -6.6 -1.6
CATCo Reinsurance Opportunities C (CATC)  -3.5 0.3 -1.6
Schroder European Real Estate (SERE)  -5.6 4.6 -1.6
Independent IT (IIT)  -9.5 -1.7 -1.6
Gresham House Strategic (GHS)  -26.9 -22.8 -1.5
Pacific Alliance China Land (PACL)  -21.9 -17.6 -1.4
Utilico Emerging Markets (UEM)  -12.9 -10.9 -1.4
Invesco Asia (IAT)  -13.5 -12.1 -1.4
Axiom European Financial Debt (AXI) -4.3 2.3 -1.4
Pacific Assets (PAC)  -5.0 -2.2 -1.4
Law Debenture (LWDB)  -12.4 -9.7 -1.3

Source: Numis Securities 2/2/17

Radical change

It is hard to say whether Syncona is cheap or expensive so radical is the change it is undergoing. Founded four years ago by Tom Henderson, brother of James Henderson, the manager of Lowland (LWI ), Law Debenture (LWDB ) and Henderson Opportunities (HOT ), Bacit was famous for convincing fund managers to give their services to charity for free.

Bacit paid nothing to the funds it invested in and donated 1% of its net asset value to Cancer Research. That has now changed, after the fund swelled to £861 million after buying Wellcome’s investment arm and taking on the world’s largest medical research charity as its largest shareholder. A £319 million share placing in December has left it bigger than Neil Woodford’s Patient Capital Trust (WPCT ), which has net assets of £783 million, and with which it shares an interest in cutting-edge healthcare science.

Syncona has now committed to paying a minimum of £4.8 million to charities for each of its next two financial years, equating to 0.3% of NAV for each year.

There will also be changed to the fund's investments. Currently nearly two thirds of the portfolio remains with an array of leading hedge fund managers and investment boutiques like Polar Capital, Polygon and Majedie. Nearly a quarter is in the life science holdings brought across by Wellcome but that side will grow as Syncona plans to invest around £100 million a year in research spin-off companies as it pursues Tom Henderson's ambition to 'win the battle against cancer and to create great returns for investors'.

At that rate it will take four or five years to complete the transition. It has a cash pile of 14%, or £133 million, waiting to be invested in new healthcare start-ups.

Shareholder shift

Not surprisingly, after such a massive change in direction there has been a great deal of movement on the shareholder register, according to Thomson Reuters data. While investment groups Schroders and Rathbones appeared to leap at the chance to back a new ‘national champion’, snapping up stakes of 4% and 3.4% respectively in December, wealth manager JM Finn & Co trimmed its stake and there has been steady selling by DIY investors on the Alliance Trust platform.

Peter Spiller’s CG Asset Management, manager of the defensive Capital Gearing Trust (CGT ), looks to have sold a small stake of 250,000 shares after the proposals were announced. For a fund manager (pictured) with an aversion to losing capital, it is likely Bacit’s previous absolute return philosophy was more to Spiller’s liking than the more speculative thrust of its new remit. That said, if the discount widens a lot more he is sure to tuck back in as he is a veteran at buying trusts cheaply.

Long-standing Bacit shareholders who have held on may want to see a swifter transition to avoid such an outcome. A combination of volatile markets and the strategic shift means the shares have basically gone nowhere in the past year, reducing three-year total returns to 10.6%.

'Expensive' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
Better Capital 2012 (BC12)  -44.9 -65.4 3.9
SQN Asset Finance Income C (SQNX)  15.6 7.4 3.3
JPMorgan Global Growth & Income (JPGI)  -3.2 -9.1 3.0
Gabelli Value Plus (GVP)  0.6 -7.9 2.9
HBM Healthcare Investments (HBMN)  -21.8 -29.1 2.8
Symphony International Holding (SIHL)  -29.5 -42.1 2.8
Eurocastle Investment (ECT)  3.2 -13.5 2.7
EF Realisation Company (EFR)  -34.6 -49.6 2.6
Prospect Japan (PJF)  -12.6 -26.4 2.6
Henderson Alternative Strategies (HAST)  -13.0 -19.3 2.6
Ratos AB B (RATOB)  70.3 34.1 2.5
JPMorgan US Smaller Cos (JUSC)  0.6 -10.1 2.5
Alliance Trust (ATST)  -4.8 -9.8 2.5
Apax Global Alpha (APAX)  -7.4 -16.4 2.4
Fidelity Asian Values (FAS)  -5.5 -11.0 2.4

Source: Numis Securities 2/2/17

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