In this series of short profiles, we ask leading fund managers to defend their investment strategies, reveal their views on cryptocurrency, and tell us what they’d never buy.
This time our interviewee is Ailsa Craig, co-investment manager of the Morningstar 4-star rated International Biotechnology Trust.
Which Sector Shows The Biggest Promise in 2022?
There is huge opportunity in the biotech sector in 2022. The space is driven by two main factors: scientific innovation, and an aging population with increased spending power. These factors are relatively immune to economic cycles. However, in 2021, while the rest of the market enjoyed a post-Covid-19 rally, the biotech sector did not participate. This has led to valuations that do not fully reflect the potential value of the underlying products. We are taking advantage of this to add to high conviction small- and mid-cap names, and to enter into exciting science we previously felt was expensive. We are also expecting big pharma companies with high cash balances and expiring product portfolios to make significant acquisitions, paying high premiums for the right companies.
What’s The Biggest Economic Risk Today?
Rising inflation and interest rates are in focus right now, so we are looking carefully at our portfolio companies’ funding positions to ensure they can withstand future macroeconomic turbulence.
Describe Your Investment Strategy
There are two central tenets to my strategy. Firstly, stock picking. I like to meet management regularly, as a great product won’t make it to market without a dynamic and capable management team. I must also believe in the science, so I dig deep into the detail on clinical trials and outcomes to determine the viability of a product. Product demand is also crucial, and that is about patient group size and pricing power. If all those boxes are ticked, next is valuation. Biotech is a sector where hype and momentum can lead to inflated values, and, conversely, when markets are turning – prices can be attractive.
The second key tenet is risk mitigation. I like to ensure the portfolio is not too skewed in any direction. This includes company size, development stage, and disease type. I also hold a broad number of stocks. Currently, we have more than 70 quoted stocks in the portfolio, which helps limit damage from any one stock failing and avoids “elephant” positions. I also steer clear of holding overweight positions in companies approaching binary events. Even in high conviction stocks, I will sell down or even out as those dates approach in order to buy back at a lower risk weighted valuation after good news is out – or avoid being hit by unexpected bad news.
Which Investor Do You Admire?
I look up to Kate Bingham, with whom I have worked since 2006. She is full of energy and enthusiasm about her job and the companies she helps build. What I admire most about Kate is she is exceptionally pragmatic and plays fair, showing you can be incredibly successful without swaying from your morals. We worked together while back to stamp out some odd behavior at a healthcare investment conference, which was hiring young models for evening entertainment. I was too nervous to say anything publicly, but Kate stepped up and called them out. She then worked with the company to get more women placed in senior roles – a great outcome.
Name Your Favorite “Forever Stock”
In biotech, companies don’t grow forever. A patented treatment has a life cycle that ends when it becomes generic and can be produced cheaply for the mass market. Nonetheless, we know demand for healthcare will go on and innovation will continue. If we keep on top of scientific developments and back the companies developing the next generation of medicines, we should continue to deliver attractive returns.
What Would You Never Invest In?
We avoid healthcare companies not focused on meeting unmet medical need and improving patient outcomes. For example, companies involved in the US opium scandal, or those price gouging in monopoly positions on old science.
Growth or Value?
In our sector, it must be growth. We aim to deliver our investors long-term capital growth combined with a yield derived from capital.
House or Pension?
I spend all day investing and am a shareholder in the investment trust I manage. I like the diversity bricks and mortar bring to my assets; the best personal investment I ever made was my first home in Peckham.
Crypto: Brilliant or Bad?
I am a scientist by training, so I like to invest in things I really understand. Anything where the value is set artificially by an external force is not for me.
What Can Be Done to Increase Diversity in Fund Management?
The current move towards a more hybrid approach to office working will be helpful to women juggling childcare with work. As a single mum, this is invaluable to me. It is good to see firms now making this the norm. Universities are also proactively offering places to students from more diverse backgrounds, so we are seeing a wider group of ethnicities and genders in our portfolio companies as well.
Have You Ever Engaged With a Company and Been Particularly Proud (or Disappointed) in the Outcome?
We recently implemented our ESG policy, and I look forward to seeing the results of our first portfolio company survey. I have no qualms about criticizing company management teams if they fall short of my ESG expectations.
What’s The Best Bit of Advice You’ve Ever Been Given?
If it looks too good to be true, it probably is.
What Would You Be if You Weren’t a Fund Manager?
A zookeeper! I have multiple cats, and am about to add a bearded dragon to the menagerie…
George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.