StemCell Therapy

Ailsa Craig of the International Biotechnology Trust

Passive equity products have become popular over the past decade as it has become easier and cheaper to track the performance of an index.

While this is a relatively low cost and straightforward way to access stocks and shares, active management remains the preferred choice for certain sectors.

We believe biotechnology is one such example. This industry often experiences high levels of binary risk.

Polar Capital: Healthcare headwinds short term in the US

The value of a biotechnology company can be significantly affected by the results of a single clinical trial or regulatory decision.

For example, in March 2019 Biogen announced it was halting the final phase of clinical trial for a drug known as aducanumab, which was designed to slow the progress of Alzheimer's disease. The share price fell 30% on the news.

If an investor buys a passive product that tracks a biotechnology index, there is no way to mitigate this type of individual stock risk.

An active manager can, however, sidestep this danger by selling out of the stock before the results of the trial are announced, therefore preserving capital.

The manager can then decide whether to reinvest or to allocate elsewhere once the results have been announced.

The biotechnology index is weighted by market capitalisation, giving it a significant exposure to the larger, well-established companies.

These firms are, however, often growing more slowly than smaller, more innovative companies.

Understanding the 'technological revolution in healthcare'

As an active manager does not have to mirror the reference benchmark, they can build a portfolio with a greater exposure to these faster growing firms.

It is also easier to implement an ethical investment strategy through an active manager.

For example, many investors want to avoid those companies that have profited from the opioid crisis.

Unless exchanged-traded fund providers exclude these firms from their benchmark index, this is impossible to do using a passive product.

Managing binary event risk and allocating a higher proportion of the portfolio to faster-growing biotechnology stocks has enabled active managers to outperform the benchmark.

Ailsa Craig is investment manager of the International Biotechnology Trust

Active management allows a manager to allocate a greater proportion of their portfolio to faster growing companies

It's easier for active managers to exclude stocks which do not match investors' ethical considerations.

Actively managed funds cost more than passively managed products, but the difference in price is not that significant

Actively managed funds come with manager risk

Excerpt from:
Sidestepping danger in the biotech sector - Investment Week

This entry was posted on November 20, 2019 at 4:46 am and is filed under Biotechnology. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed. |