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A theme running through these monthly columns is to seek situations where there has been a disconnect between sentiment and fundamentals \u2013 and, in all humility, suggest opportunities when the former trails the latter. There are periods when such opportunities are less abundant than others. However, perhaps in part because of the interesting times in which we live and the concurrent volatility, there appears to be a good selection of special situations offering potential at present. Given the often specialist nature of the sectors involved, these investments are usually found beyond the mainstream where investors sometimes tread with caution. And therein lies the opportunity.<\/p>\n
For context, the companies highlighted in this column have recently been bought in one or more of our portfolios\u00a0\u2013 portfolios which achieve a range of risk-adjusted returns and income levels. As such, the extent of exposure is guided by portfolio remits including income requirements, for these are neither low-risk nor low-volatility investments \u2013 and ones which may also disappoint in the short-term. Yet history suggests it is usually better to be too early than too late as sentiment can improve suddenly, and the upside can be significant given the extent of mispricing both of the underlying investments and trust.<\/p>\n
Biotechnology<\/u><\/strong><\/p>\n As regular readers are aware, the healthcare sector is one of our favoured themes and one which has rewarded over time. Yet recent performance has fallen away for various reasons. Sentiment now fails to reflect the sound fundamentals which include rising demand from an ageing population, strong innovation and drug development, and a growing middle class especially in Asia. The usual starting blocks for portfolios are the \u2018generalists\u2019 which cover the full spectrum of the sector \u2013 such as Worldwide Healthcare Trust (WWH)<\/strong>. Yet the portfolios have been adding to their biotechnology exposure because this sub-sector looks attractively valued after its severe derating, and straws in the wind suggest optimism.<\/p>\n This is particularly so when it comes to smaller and early-stage companies, including those looking to raise finance and move on to the next stage of development which are finding the economic environment less challenging. Meanwhile, this segment of the sector remains the engine room when it comes to innovation and productivity \u2013 around two-thirds of the biopharmaceutical pipeline is generated by small and midcap biotech companies. This continues to be the case even though sentiment towards this sector has been rock bottom, with smaller biotech\u2019s underperformance since early 2021 having recently driven valuations to record lows.<\/p>\n A reversion back to historical averages would appear to be deserved in part because the macro-environment has improved. Small and mid-cap stocks have been more adversely\u00a0affected by the rising interest rate environment since 2021. Now that the Fed has pivoted to gradually reducing rates, small and mid-cap\u00a0stocks should benefit disproportionately. The larger companies both within the biotech and wider healthcare sector generally have noticed. The better fundamentals and attractive valuations largely account for the strong M&A activity which is increasingly evident as larger pharmaceutical companies bolster their product ranges.<\/p>\n International Biotechnology Trust (IBT)<\/strong> has outperformed its benchmark over most timeframes under its experienced team. The managers are positive about prospects: \u201cDespite the recent rally, the Reference Index remains well below its peak of 2021 \u2026 suggesting significant future upside potential, given the sector\u2019s accelerating pace of innovation \u2026 The implementation of the US Inflation Reduction Act, which may negatively impact the pricing of key established drugs sold by large pharmaceutical companies, could increase the demand for innovative biotechnology still further.<\/em>\u201d The company pays a dividend equivalent to 4% of its NAV \u2013 which equates to a yield of c.4.4% given its discount.<\/p>\n Fintech sector<\/u><\/strong><\/p>\n Technology exposure for many investors generally consists of the larger investment companies providing broad exposure, even when focusing on smaller companies like Herald Investment Trust (HRI)<\/strong> \u2013 which we own. However, dig below the surface and the fintech industry offers attractive opportunities. The sector is disrupting the banking, insurance and wider financial services sectors courtesy of its innovation and many financial systems having not evolved. Assisted by AI, estimates suggest annual sector growth is 22%, yet it represents just 3% of a $14 trillion global financial services market. Little wonder incumbents are acquiring fintech challengers, and so crystallising good exit routes and driving growth.<\/p>\n Augmentum Fintech (AUGM)<\/strong> unjustly suffers from the wider travails of the private equity\/venture capital sectors which are suffering from a lack of companies going public. The managers have generated an internal rate of return of 38% and 2.5x capital invested from its seven exits since coming to market, with over \u00a3100m realised\u200b\u200b. They\u2019ve produced the goods. All members of the senior team have either been founders and\/or senior executives at technology companies such as\u00a0Flutter.com\/Betfair and Covestor and have collectively invested in over 100 early stage fintech companies. They remain well-positioned to capitalise on the many opportunities offered by the early-stage European ecosystem.<\/p>\n The company\u2019s investments are well-diversified across the fintech ecosystem, and it owns businesses with high growth rates. Recent figures show the top 10 positions, representing nearly 80% of NAV, saw average revenue growth of c.50% over the previous 12 months. Combined annual revenues of these positions were \u00a31.25 billion. Cash burn is closely monitored to ensure future funding rounds can be supported.\u00a0Importantly, recent news saw retail trading platform eToro list on NASDAQ and digital banking disruptor Chime file for an IPO. Despite slower growth, these are happening with significant premiums to AUGM\u2019s company valuations. A 40% discount to NAV does not reflect the company\u2019s potential.<\/p>\n Specialist miners<\/u><\/strong><\/p>\n Portfolio holdings include exposure across the commodities spectrum via BlackRock World Mining Trust (BRWM)<\/strong>, which tends to focus on larger mining stocks. However, they have also recently been buying companies which favour precious metals and uranium. My column \u2018The case for precious metals<\/em>\u2019 (22 November 2024) explains why we remain positive on the outlook for gold and silver, despite the expected volatility. Meanwhile, company share prices have lagged metal prices and stand on near-record lows. Yet the rising gold price and easing cost pressures are making for record margins, at a time the larger producers have underspent on exploration and need to acquire smaller companies to replenish reserves.<\/p>\n CQS Natural Resources Growth & Income (CYN)<\/strong> is currently weighted c.50% precious metals and c.11% uranium, via mostly smaller companies. Following a strategic review, the Board is offering shareholders on the Register on 29 May a choice \u201cbetween remaining invested in the Company with value-enhancing\u00a0initiatives (an enhanced dividend, lower management fees), and\/or exiting for cash through the Tender Offer\u201d<\/em>\u00a0on 25 June. The portfolios will NOT be tendering their shares given the company\u2019s peer-topping track record, its experienced team and the portfolio outlook. We also look forward to receiving an increased dividend which will distribute 2% of quarter-end NAV \u2013 equating to yield of 8.5% at current prices.<\/p>\n Golden Prospect Precious Metals (GPM)<\/strong> seeks capital growth mostly from the listed equities of smaller companies in the precious metals sector, with around three-quarters of portfolio exposure relating to production. A recent conversation with the managers highlighted the extent to which mining companies have trailed rising gold and silver prices, despite inflationary cost pressures easing, and as such equities promising further margin improvement. The sector is now generating some of the highest free cash flow on record, which could be a catalyst for increased M&A activity as the larger producers look to grow or replace reserves. A good track record and 24% discount when bought suggest optimism.<\/p>\n Geiger Counter Ltd (GCL)<\/strong> reflects the strong long-term outlook for uranium prices. With global ambitions to triple nuclear generating capacity by 2050 set against a backdrop of limited supply growth, we added to our exposure to GCL as recent uncertainty has weighed heavily on uranium mining equities. Again, speaking recently with the management, the outlook remains promising. Short-term, inventory levels across utilities in established Western markets, which generate some 20% of their electricity from nuclear power, are approaching low levels. Before too long, these countries will need to undertake a further round of contracting to ensure electricity availability.<\/p>\n Longer-term considerations are also supportive. Although the advance of technology is helping to bring costs down, nuclear power plants tend to be high-cost long-term investments, with uranium supply typically tied to long-term contracts. Yet the uranium spot price makes up just c.5% of the overall cost in the production of nuclear power. Given this, and the fact nuclear power stations are expensive to stop and start, demand for uranium tends to be price inelastic. Meanwhile, heightened geo-political tensions, together with nearly half of the world\u2019s production being based in Kazakhstan, is encouraging a strategic reappraisal of its importance by various countries including the US.<\/p>\n Disclaimer: The information contained in this article does not constitute investment advice or a personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" A theme running through these monthly columns is to seek situations where there has been a disconnect between sentiment and fundamentals \u2013 and, in all humility, suggest opportunities when the […]<\/p>\n","protected":false},"author":8,"featured_media":548,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[6],"tags":[],"class_list":["post-1317","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-news"],"acf":[],"yoast_head":"\n