There aren't many other industries as innovative and fast-moving as biotechnology. Over the past five years, average share prices in the sector have stormed ahead of other global equities, but have been more subdued over the past few months.
Linden Thomson, manager of the AXA Framlington Biotech Fund, feels the long-term outlook for the sector remains strong. In her view, global demographics such as ageing populations, alongside a growing middle class in emerging markets (who are able to afford medicines), supports healthcare demand. The regulatory environment also remains conducive, particularly in the US where the US Food and Drug Administration (FDA) has implemented a number of incentives for companies to develop innovative drugs to treat diseases with no alternative therapies.
The biotech sector is home to both large, well-established firms and small, innovative start-ups. Linden Thomson invests across the spectrum, with around half the fund exposed to larger companies and the remainder split roughly equally between higher-risk small and medium-sized companies. She seeks companies with innovative characteristics: by offering a unique product, or a more efficient product than available from competitors, they have the ability to price their drugs at a premium. Companies that aren't innovative could struggle to survive as new cutting-edge companies come to the fore. With 70 new biotech companies listing on the stock market last year, there is plenty of competition.
She particularly favours companies concentrating on rare diseases. Drugs produced by these companies tend to have the support of regulators and a lack of competition allows the firm to charge a premium for their product. Current investments in this area include Vertex Pharmaceuticals and Gilead Sciences. Vertex supply the only drug which treats the underlying mutation for cystic fibrosis (all other medications simply treat the symptoms) and charge £300,000 per year for the cure. Similarly, Gilead has developed a treatment for Hepatitis C which costs $1,000 per day. These drugs provide a steady, reliable income stream for the period the drug is patented, or until a rival firm develops a superior alternative.
Linden Thomson assumed management of the fund in July 2012. Over her tenure, it has performed broadly in line with the benchmark, rising 177.5% compared with 178.9%* for the NASDAQ Biotechnology Index. Although please remember past performance is not a guide to future returns.
Performance of the AXA Framlington Biotech Fund over the manager's tenure
|Annual percentage growth|
| July 10 -
| July 11 -
| July 12 -
| July 13 -
| July 14 -
|NASDAQ Biotechnology TR||34.62%||26.84%||38.99%||31.34%||54.87%|
|AXA Framlington Biotech Fund||25.28%||24.43%||36.21%||32.32%||59.58%|
Past performance is not a guide to future returns.
Source Lipper IM* to 01/07/2015
Our view on this fund
Like all funds investing in a niche area, the AXA Framlington Biotech Fund's fortunes rely almost wholly on the performance of biotech stocks in general. While we expect the manager to capture the majority of any market rise, we feel the specialist nature of the fund makes it difficult for her to add significant value through stock selection or asset allocation. We would not therefore expect the fund to significantly outperform the index or shelter investors from share price falls.
Low interest rates have allowed many biotech companies to invest in research and development at a lower cost which has helped boost innovation within the sector. Any rise to interest rates could therefore knock investor sentiment, negatively affecting share prices. That said, Linden Thomson does not expect a correction and feels the sector could make further gains. Similar to many higher-risk specialist funds, the fund provides a way to access a niche area, other alternatives include ETFs, although we believe exposure should only account for a small portion of a portfolio. The fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors.