Stop, look and listen

We heard from the managers of two very different trusts in the first week of our ISA season events series – global equities giant Alliance Witan (ALW) and high-tech medical specialist International Biotechnology Trust (IBT).

Highlights

One of the key takeaways was that over-diversification can be a significant drag on returns. Craig spoke about the majority of funds outperforming in their top 10 or 20 overweight positions but the rest of the portfolio tending to destroy value. He attributed this to funds having a competitive edge in only their highest-conviction ideas, while many of the remaining holdings serve as ‘filler’ stocks, added primarily for risk management due to the volatility of a highly concentrated portfolio. In contrast, Alliance Witan manages risk by blending allocations at the top-level, ensuring that every stock is a ‘best idea’ rather than being held as a risk control mechanism.

Craig also discussed the difficulty of top-quartile single-manager funds sustaining outperformance over the medium term. He noted that only 50% of top-quartile managers from the 2003–2005 period remained in the top quartile over the following three years, with this figure dropping to just 3% in the subsequent three years. This trend has accelerated over the past decade, with fewer than 5% of top-quartile performers from 2018–2020 maintaining their ranking in 2021–2023. These findings underscore the advantages of blending managers with complementary approaches and increasing the likelihood of sustained outperformance.

Highlights

Ailsa and Marek described a positive picture on a fundamentals basis in the biotech sector. There are lots of companies trading well below the cash on their balance sheet, while the biotechs are the major source of new drugs rather than the large-cap pharma stocks, unlike in past cycles. This means they are better M&A targets, and large cap pharma is in major need of new drugs to replace lots of expiring patents over the next few years. IBT has had some large positions benefit from M&A in the past year, delivering good returns to shareholders, and the managers think the outlook is for more in 2025, with a more supportive regulatory environment under a new administration.

The managers told us why they are focussing more on the smaller companies in their sector, and what the key medical areas covered in the portfolio. They also discussed the demographic tailwinds behind a growing demand for medicine as well as the impact of the GLP-q weight-loss drugs. Biotechnology has a track record of delivering exceptional returns when it is in favour, and we think IBT is an interesting way to play it, particularly on its current discount to NAV of around 10%.