AXA Framlington Biotech - takeover activity boosts performance

• Many small and medium-sized biotech businesses offer impressive levels of innovation
• An unusually high number of company takeovers boosted recent performance
• Over the longer term our analysis suggests specialist funds struggle to outperform their benchmarks

Our View

Biotechnology is often regarded as one of the most interesting and exciting areas of the stock market. The work done in this sector has the potential to save and improve lives, and the pace of innovation has been high in recent years. Linden Thomson, manager of the AXA Framlington Biotech Fund, leads an experienced team that aims to make the most of the opportunities on offer.

The fund does not currently feature on the Wealth 150 list of our favourite funds. Our aim is to identify funds we believe will outperform their respective benchmark or peer group over the long term. However, our analysis shows it’s difficult for managers investing in a specialist area of the market to outperform their benchmark over the long term. Specialist fund managers are fairly constricted on where they can invest, whereas managers that run more diversified funds can choose if and when to increase exposure to a specific area.

We believe a broader portfolio is likely to provide adequate exposure to the biotech industry. We suggest investors wishing to gain specific exposure to this industry should usually ensure it forms a small portion of a portfolio as it is significantly higher risk.

How has the fund performed?

The fund has grown 181.6%* since Linden Thomson took over its management in July 2012. While this is an attractive return, the fund has underperformed its benchmark by 5.6%, although it outperformed by 5.6%* in January this year. Five of the fund’s investments were subject to takeover offers from other companies in January, and this significantly boosted their share prices. Blood disorder drug manufacturer Bioverativ, for example, rose 61.9% the day it received a takeover approach from larger competitor Sanofi. This is over a short timeframe, however, and past performance should not be seen as a guide to future returns.

Past performance is not a guide to the future. Source: *Lipper IM to 31/01/2018

How is the fund invested?

The team seek companies in a financially strong position, run by high-quality management teams, with a pipeline of innovative new drugs and treatments. They focus their search in areas of high unmet need, as this increases the size of the potential target market.

The fund is biased towards small and medium-sized companies, which is a higher-risk area, but one where significant levels of innovation are taking place, according to the team. These companies are often missed by analysts and other investors, so the team believes this gives them the opportunity to spot good companies overlooked by other investors.

Current investments include Spark Therapeutics, a company that is pioneering methods of delivering DNA to correct genetic defects. This could be applicable to a range of disorders from haemophilia and muscular dystrophy to Huntington’s disease (a condition that results in the death of brain cells).

Outlook

While some company’s in the biotech industry performed well last month, investor sentiment towards the sector fell in recent months when some of the biggest companies released lacklustre results. This means their share prices fell and many companies with good longer-term prospects are now attractively valued, according to the team.

Furthermore, they believe the ageing global population and increases in lifestyle-related illnesses, such as obesity and heart disease, could underpin demand for healthcare, and encourage development in the industry, for years to come. Long-term investors could therefore be rewarded, in their view, though there are no guarantees.

Find out more about this fund including how to invest

Please read the Key Features/ Key Investor Information in addition to the information above.