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The Healthcare
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Investing for a healthier future
with OrbiMed's Sven Borho
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Run for the hills?
JIM MELLON SEES A "SIGNIFICANT DOWNTURN"
AHEAD FOR MARKETS
Cyber Wars II
HOW TO INVEST IN THE
NEW ARMS RACE
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THE COMPANIES THAT KEEP ON GIVING
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But after the stunning performance of recent years, investors will be asking them-
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selves whether there's more to come. Setting aside the short term, it appears Advertising
that the sector has some of the strongest fundamentals around, and that the amanda@masterinvestor.co.uk
structural trends underpinning its outperformance will be with us for some time.
Editorial Enquries
james.faulkner@masterinvestor.co.uk
Just take the subject of ageing populations, for example. In his article on page
36, Filipe R. Costa explains that the global population of those aged 80 or above,
which was mostly non-existent just a couple of decades ago, is expected to more
than triple in absolute size over the next 35 years. What's more, by the end of this FOLLOW US
decade, the spending power of those aged 60 or more will hit $15 trillion globally,
up from $8 trillion in 2010. These are long-term secular trends that will take time
to play out. With that in mind, there appears to be a lot more to play for.
Those looking to capitalise but also wishing to spread the risk would do well to
read Nick Sudbury's article on page 20. As Nick explains, this is a complex and
specialist area where a knowledgeable fund manager should be able to add sig-
nificant value via their stock selection decisions, but there are only a handful of
investment trusts and open-ended funds that concentrate specifically on this part
of the market.
exclusive book offer
Meanwhile, for those investors who like to take a more hands-on approach, the
To get 25% off on
industry insights of Dr Andy Smith (pages 16 & 42) are an essential read in order
THE GEOMETRY OF
to not come unstuck when it comes to picking a biotech stock. There's also my
exclusive interview with John Dawson of Oxford BioMedica (page 32), a company WEALTH
which is making some very exciting progress in the cutting-edge field of gene- CLICK HERE
based therapies. and use the
promo code:
Whatever your investment persuasion, I'm sure you'll find this month's issue as
insightful and as entertaining as ever. MASTERBOOK
Best regards,
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www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 40 – JULY 2018 | 3
CONTENTS
issue 40 – JULY 2018 www.masterinvestor.co.uk
The Healthcare
Revolution
Investing for a healthier future HEALTHCARE FEATURES
with OrbiMed's Sven Borho
plus...
Run for the hills?
010 Sharpe Minds - In Healthcare We Trust
JIM MELLON SEES A "SIGNIFICANT DOWNTURN"
AHEAD FOR MARKETS James Faulkner interviews Sven Borho, manager of the Worldwide Healthcare
Cyber Wars II
HOW TO INVEST IN THE
NEW ARMS RACE
Trust, one of the largest healthcare-focused investment vehicles on the London
Compound returns
THE COMPANIES THAT KEEP ON GIVING
market.
Recovery stocks
HOW TO AUTOMATE YOUR STOCK-PICKING
IN A TRICKY AREA
on the cover
006 Mellon on the Markets
Inside the mind of the Master Investor:
billionaire UK investor Jim Mellon sees
a "significant downturn" ahead for
global stock markets.
056
Dividend Hunter – 3
high yield capital-light
compounders
026 From
picking recovery shares
Acorns to Oak Trees – Opportunities in small cap
Ex-IG chief market strategist David healthcare
Jones believes it could be time for
traders to position themselves for a Richard Gill, CFA, looks at three interesting small cap healthcare/biotech businesses
longer-term move in the dollar. which he believes are worthy of further investigation.
4 | ISSUE 40 – JULY 2018 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk
032 Movers and Shakers – It's in the genes 072 Book Review –
The Geometry of Wealth
Master Investor Editor James Faulkner quizzes John Dawson, CEO of Oxford BioMedica,
a UK-based pioneer in gene and cell-based therapies. Richard Gill, CFA, reviews The Geometry
of Wealth, a book in which author Brian
036 The Macro Investor – How to invest for an ageing Portnoy focuses on what being wealthy
popula tion truly means and how wealth has the
ability to underwrite a meaningful and
While governments and academics discuss ways to tackle the problems created by an ultimately happy life.
ageing population, investors should start tweaking their portfolios to profit from them,
argues Filipe R. Costa.
www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 40 – JULY 2018 | 5
BY JIM MELLON
mellon on
the markets
I am in Ibiza enjoying the sun and the languor for a couple of days. Later this week I am due
in Switzerland to talk about longevity, as well as the meatless future – both subjects which
are connected and which I am increasingly convinced will come to dominate investment
conversation in the relatively near future.
In the past month I have spoken at trapharma) to assist in drug discov- least the cool-down. I think this is to
the Cog X AI conference in London, ery and commercialisation. As I keep be expected; you have had a debt-
which I have to say was brilliantly on saying, in my various presenta- fuelled rally for many years now in
organised and very well attended. tions around the place, AI for novel most major markets, encouraged
Since my "I" is in tech terms some- compound discovery in pharmacol- by central banks who are now, to
what lacking, I had to use the "A" ogy didn't exist when Al Chalabi and I almost a man (not many women so
part to get some factoids in order to wrote Cracking the Code six years ago far in central banking), tightening the
appear well informed on the panel – and nor did cancer immunother- spigots.
on which I was speaking. apy, a cure for Hep C, and CRISPR,
the gene editing technique which is Why anyone would think this would
Cog X, which looked at AI in medi- becoming the gold standard for ge- be positive for equities is beyond
cine, was hosted and well moder- netic engineering. me. In fact, the assertions made by
ated by Softbank's Sakshi Chhabra. many pundits and fund managers
I have said for a while that many What's going to happen in the next also astonish; the view, for instance,
doctors will soon be receptionists in five years? No one knows – but that bank stocks always go up in an
front of smart computers, and so it surely, it's got to be good! era of rising interest rates is one
is coming to pass. Here's a factoid such shibboleth. All the major US
example: mammograms are notori- The coming bear market bank stocks are down this year, in-
ously unreliable, for instance, send- cluding Citigroup (NYSE:C), which is
ing one in two women to biopsies Sadly, that doesn't apply to the im- now off by 13 per cent.
that in most cases are unnecessary mediate future for markets, be they
and traumatic. Today, AI can assess for bonds or for equities. There is I read recently that the average fund
the results of the mammogram with a fin de siècle feeling around at the manager in the UK and in the US
a 99 per cent accuracy, obviating moment; small rallies quickly fizzling hasn't been in the job for very long:
the need for surgical intervention in out in favour of lower lows, in many 40% for less than eight years, or in
both cases. – indeed most – prices for stocks and other words, 4 out of 10 for less than
fixed income instruments. Growth is the period since the financial crisis.
Already, Juvenescence, the company slowing everywhere, particularly in No wonder complacency abounds,
founded by my partners and I a few Europe and in China, and in some and valuations that would normally
months ago, has access to two su- markets the boil has turned into, be looked at askance – especially go-
perb AI platforms (Insilico and Ne- well, not exactly the freeze, but at ing into an era of slowing, rather than
6 | ISSUE 40 – JULY 2018 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk
MELLON ON THE MARKETS
www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 40 – JULY 2018 | 7
MELLON ON THE MARKETS
About Jim
Jim is an entrepreneur with a flair for identifying emerging global trends enabling him to build a worldwide business
empire. He is amongst the top 10% in the "Sunday Times Rich List" (Britain's equivalent to the Forbes list). He is often
described as the British Warren Buffett and he predicted the Credit Crunch of 2007-08 in a book entitled Wake Up!
Survive and Prosper in the Coming Economic Turmoil. Jim followed this with The Top 10 Investments for the Next 10 Years
(2008) and subsequently Cracking the Code (2012), Fast Forward (2014) and, most recently, Juvenescence (2017). His
monthly "Mellon on the Markets" column in Master Investor Magazine has gained him cult status among investors.
He holds a master's degree in Politics, Philosophy and Economics from Oxford University. He is on the Board of Trus-
tees of the Buck Institute in California, a trustee of the Biogerontology Institute, and a Fellow of Oriel College, Oxford.
8 | ISSUE 40 – JULY 2018 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk
BY JAMES FAULKNER
SHARPE MINDS
In Healthcare
We Trust
AN INTERVIEW WITH Sven Borho of the Worldwide Healthcare Trust
This month, James Faulkner interviews Sven Borho, manager of the Worldwide Healthcare Trust
(LON:WWH), one of the largest healthcare-focused investment vehicles on the London market.
The interview covers a lot of ground, from company valuations, tax and regulatory issues, M&A
activity and future advances in technology.
James Faulkner: Hi Sven and thanks covery and development are at all-time SB: There are multiple subsectors we find
for taking the time to speak with highs, thus the need for business devel- very investible right now. First, biotech-
Master Investor. The healthcare sec- opment has never been greater, leading nology companies remain the nexus of
tor has been one of the most excit- to numerous investment opportunities innovation within therapeutic stocks. On
ing and financially rewarding places across many healthcare subsectors. Phy- one hand, the large capitalisation com-
to invest in recent years. What, to sician and patient expectations continue panies are probably oversold, with val-
your mind, are the major factors to rise for new drugs that will not only uations close to historical trough levels.
that are driving returns right now – address unmet medical needs but add That said, we have become incrementally
and how long can they continue? quality years to their lives. We expect this more selective within that space as these
trend to continue for some time. companies have matured over the past
Sven Borho: First and foremost, the decade, while some have become "haves"
secular demand for healthcare related JF: Which particular areas within the and some "have nots" with respect to
goods and services is unabating and healthcare space do you find attrac- new product opportunities. On the other
is in fact accelerating given the ageing tive right now – and how is this re- hand, the emerging biotechnology com-
population and increased insistence of flected in the portfolio? panies have created a plethora of poten-
quality of life standards across the globe. tial new drugs that are in early, mid and
Second, we are currently in a golden age late stage development. Finding the "next
of innovation. The fruits of the genomic big thing" within those companies is our
revolution that became prominent at the
“THERE ARE passion.
turn of the century are now producing MULTIPLE
new drugs: the most efficacious treat- SUBSECTORS Additionally, we are finding real value in
ments – and in some cases, cures – that WE FIND VERY some of the generic and specialty phar-
we have ever seen. maceutical companies that have been
INVESTIBLE RIGHT beaten up over the past two years. Fun-
Meanwhile, as both demand and innova- NOW.” damental concerns about generic pric-
tion increase, the complexity of drug dis- ing and the commoditisation of generic
10 | ISSUE 40 – JULY 2018 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk
SHARPE MINDS
“WE ARE
CURRENTLY IN A
GOLDEN AGE OF
INNOVATION.”
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SHARPE MINDS
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SHARPE MINDS
holders to create impactful but tolerable Already in 2018, we have seen numerous SB: Overall, healthcare companies re-
changes to the drug pricing system, with "tuck-in" or "bolt-on" acquisitions in the main at the very early stages of incor-
a clear primary intention to reduce out- therapeutics space, all with significant porating AI into their businesses, with
of-pocket expenses for patients rather premiums and prices that are 5 to 10 companies such IBM (NYSE:IBM) (Wat-
than simply trying to reduce prices just times higher than their recent lows. For son) and Alphabet (NASDAQ:GOOGL)
for the sake of it. Pharma and Biotech example, Swiss-pharma giant Novartis looking at ways to use their advances in
CEOs "have a seat at the table" with the (VTX:NOVN) recently acquired the gene this field to improve patient management
President and many of the proposals be- therapy company AveXis for $218 per and wellness initiatives and advance the
ing considered by Trump are, in fact, in- share in an $8.7 billion transaction. Only predictive capabilities of medical devices
dustry proposals. two years ago, AveXis was trading at $16 and robotics programs. Several partner-
per share. Another exciting target is so- ships have already occurred, with IBM/
Overall, our expectation is that President called CAR-T, a type of cell therapy used Medtronic (NYSE:MDT) in diabetes and
Trump just wants to "do something" in or- to treat specific forms of cancer. This Jan- Alphabet/J&J (NYSE:JNJ) in surgical ro-
der to declare a populist victory in health- uary, global biotechnology company Cel- botics for example.
care, after failing to repeal the Affordable gene (NASDAQ:CELG) acquired one of
Care Act (aka "Obamacare") in 2017. We the pioneers of CAR-T, Juno Therapeutics. More specifically, AI is helping to improve
think the net effect will be positive as the the development of algorithms for many
impact to bottom lines of drug compa- JF: How are the disruptive forces of electronic implantable devices, especially
nies will ultimately be minimal and the AI and robotics transforming the within the cardiovascular market, and
removal of this long-time headwind will healthcare sector, and how is WWH has the potential to advance robotic sur-
help de-risk the space and generate new participating? gery over time as machine learning bet-
generalist interest.
JF: Global M&A activity among About the Worldwide Healthcare Trust
healthcare corporates surged in
2017, by 27% to $332 billion. What Worldwide Healthcare Trust PLC (LON:WWH) is a London-listed investment
are the dynamics at play here? Is trust that invests in the global healthcare sector with the objective of achiev-
this mostly down to corporates ing a high level of capital growth. In order to achieve its investment objec-
looking to make efficiencies due to tive, the company invests worldwide in a diversified portfolio of shares in
cost pressures? What is the outlook pharmaceutical and biotechnology companies and related securities in the
for M&A going forward? healthcare sector. It uses gearing, and derivative transactions to mitigate
risk and also to enhance returns.
SB: We certainly saw an increase in
healthcare M&A in 2017 that has thus far
carried over into 2018. The reasons are
multi-faceted. First, as discussed above,
as both demand and innovation increase,
the complexity of drug discovery and de-
velopment are at all-time highs, thus, the
need for business development has never
been greater, leading to a bounty of M&A
opportunities.
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SHARPE MINDS
overweight exposure to innovative cardi-
ovascular companies as well as general
surgical robotics.
14 | ISSUE 40 – JULY 2018 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk
SHARPE MINDS
from industry (including 15 former CEOs make it ripe for almost all global indus- For emerging biotech stocks, valuation
or company founders). In short, we have tries, but it is particularly so for health- calls are more nebulous. Here, our cata-
the in-house expertise that allows to do care. In addition to basic demand for bet- lyst-driven strategy is key. Our continued
primary due diligence and alpha genera- ter healthcare, the regulatory authorities focus on clinical and regulatory events
tion that is incomparable. there have made the new drug approval can see share prices re-rate multi-fold re-
process much more stringent, adopting gardless of other market dynamics. Plus,
Additionally, we believe that OrbiMed is Western best practices. Not only does we believe this sector will continue to wit-
distinguished by the breadth of its invest- this favour multinational companies in ness accelerating M&A activity which can
ment activities across the healthcare sec- which we are already invested, but also also drive share prices higher.
tor, which range from seed-stage venture domestic companies with industry lead-
capital investments up to large multina- ing capabilities, including drug discov- JF: Looking across your portfolio
tional public corporations globally. Fur- ery, development, manufacturing, and right now, which particular drug/
thermore, OrbiMed is an active investor commercial capabilities, thereby creating product/technology under develop-
across the capital structure, including novel investment opportunities which we ment excites you the most in terms
private equity, private debt, public equity, can consider. of its potential to improve human
public debt and exotic assets such as lives and wellbeing?
healthcare royalty streams. JF: The biotech sector was subjected
to a pretty harsh sell-off in 2015 but SB: Innovation is a critical theme in
The scale of our platform and team of- has since recovered rather robustly. healthcare. Oncology is one particular
fer competitive advantages to our pub- How do valuations in the sector therapeutic category that is in the throes
lic equity team in many respects: deep currently compare with the wider of a revolution, with new technologies
proprietary research capabilities from market, and how concerned are you and drugs that are offering cures to pa-
our diverse team members, idea sourc- about the risk of a major correction tients, in some cases. And commercial
ing from private market professionals, in light of the fact that this bull mar- success is also being observed with me-
and research/analytic resources shared ket is now one of the longest on re- ga-blockbuster launches now being seen.
broadly across the firm in areas such as cord?
prescription trend data. Other areas are also seeing exciting leaps
SB: Valuations for major biotech stocks forward in terms of new-found efficacy
JF: The portfolio is overwhelmingly are currently undemanding. In fact, these for compounds in development. Cystic
focused on the US, which is pretty stocks are trading well below their his- fibrosis, haemophilia, immunology, dia-
much par for the course when it torical averages. So, while we have seen betes, rheumatology, and even Alzheim-
comes to investing in healthcare. some recovery in share prices, we have er's disease have all bore witness to im-
But aside from the US, where do you also seen some multiple compression. proved therapies or are perhaps about to
see the biggest opportunities in the There is additional upside opportunity see material advances in the treatment of
healthcare market globally? Emerg- going forward. these maladies.
ing markets? China?
www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 40 – JULY 2018 | 15
BY ANDY SMITH
That priority starts with share buy- same stock. If pharmaceutical com- tors' expectations of M&A and phar-
backs (which enhance earnings per panies with all the specialist scien- maceutical companies' reluctance to
share and on which management tific, regulatory, clinical and commer- engage in it, and it can be termed the
are typically remunerated), then in- cial expertise at their disposal think illusion of the 'positive clinical trial'.
creased dividends (good news for a biotech company is over-valued,
pharma investors), capital expend- why don't investors? When I was a fund manager, life was
iture, and then, right at the bottom much more binary: when a drug
of the list, M&A. Many management Differences in didn't work, the company had to
teams at big pharma have stated in perspective announce the failure and the stock
their recent quarterly earnings calls price immediately suffered. These
that it is the high price of attractive There is more than one reason for days, there are many more shades
assets that is putting them off trans- this difference in perspective. The of grey and it seems that as long
acting. With pharmaceutical produc- first is not a contemporary issue and as there is the tiniest piece of 'posi-
tivity at an all-time low and investors has always been the case. Investors, tive' information in the clinical study
and pharma business development unlike pharmaceutical companies, – like the drug being as safe as the
teams chasing the same late-stage can take small positions in a biotech placebo arm even if it failed to show
assets, there is some element of company and nothing has to be dis- efficacy – the study can be termed
truth in this. closed. In addition, most investors 'positive'.
are less risk-averse than the average
There is also an interesting subtext in pharmaceutical company CEO, so I used to think that only the algo-
this lower than expected number of can invest in a biotech company at rithms were fooled by biotech com-
biotech acquisitions which explores an earlier stage, ahead of, or in hope panies announcing 'positive' clini-
the disconnect in the expectations of of, price-moving data. But there is a cal trial results when they weren't,
investors and pharma buyers for the contemporary issue that links inves- but some investors, (although not
16 | ISSUE 40 – JULY 2018 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk
WHY THE BIOTECH M&A 'BOOM' HAS LOST ITS LUSTRE
www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 40 – JULY 2018 | 17
WHY THE BIOTECH M&A 'BOOM' HAS LOST ITS LUSTRE
potential pharmaceutical acquirers) prising that of all the drug classes that
may also have been. There is another have been approved to lower blood
weapon in the armoury of 'positivity' glucose in diabetic patients, only two
that is hitting new highs in 2018 after drugs in each of two classes (the SGLT2
building momentum for many years inhibitors and GLP-1 receptor agonists)
within pharmaceutical companies. This have demonstrated a mortality benefit
is the surrogate marker. while others, like the DPP-IV inhibitors
have shown neither a cardiovascular
Surrogate versus benefit or liability.
functional markers
These are the reasons why drug reg-
The surrogate marker is a biochemi- ulators now demand cardiovascular
cal or immunological test result that is outcome trials (CVOTs) in order to
supposed to be correlated with clinical demonstrate the positive outcomes of
efficacy. Of course, surrogate markers the drug, rather than relying on surro-
are cheaper and much easier to meas- gate markers that may or may not be
ure than a hard clinical endpoint like related to real clinical outcomes. One
overall survival (in oncology) or the six of the reasons why the biotech com-
minute walk test (in Duchenne muscu- pany acquisition spree is not underway
lar dystrophy), but many biotech com- could be that pharmaceutical compa- Surrogate markers and
panies present their surrogate marker nies are also not convinced by surro- NASH
data to their investors as a substitute gate markers, and instead want to see
for the approvable and functional clin- some demonstration of clinical bene- This battle of surrogate markers versus
ical endpoints. fit. The other reason why biotech and functional markers is coming to prom-
pharmaceutical companies conduct inence in a reasonably new indication
For many years this practice prolifer- CVOTs is so that payers will reimburse – non-alcoholic steatohepatitis (NASH).
ated amongst pharmaceutical com- the drugs on the basis of the value gen- NASH is the disease that results in liver
panies and can be traced back to erated. (More on how this is evaluated damage and ultimately death due to
lipid-lowering drugs. The logical corre- while the drug is still in development is inflammation, fat accumulation and fi-
lation was that if good lipid levels were explained in a separate feature in this brosis in the liver. NASH patients have
raised by a drug, or bad lipids were issue.) a history that includes obesity and di-
lowered, that would translate into
lower mortality or death – perhaps the
archetypal observed hard clinical out-
come. Only recently have drug regula-
tors asked for the functional mortality
rate, rather than surrogate (blood lipid
levels) evidence that prove the clinical
claims.
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WHY THE BIOTECH M&A 'BOOM' HAS LOST ITS LUSTRE
www.masterinvestor.co.uk | Master Investor is a registered trademark of Master Investor Limited ISSUE 40 – JULY 2018 | 19
BY NICK SUDBURY
funds in focus
Healthcare and
Biotech funds
a promising prognosis
If you had to choose one part of the market with the potential to change the world for the
better, it would have to be the healthcare and biotech sector. The scientific advances in
areas such as immuno-oncology and gene therapy are likely to produce numerous break-
throughs in the treatment of a whole range of diseases, improving patient outcomes and
generating huge returns in the process.
New diagnostic technology will also companies to reach the commer- The President has been highly criti-
have a key role to play. A prime ex- cial stage. Sales of Axumin have ex- cal of the industry for allowing prices
ample of how these sorts of cutting ceeded expectations and enabled to go through the roof and has tried
edge advancements can improve the business to become profitable to address this by encouraging new
people's lives is provided by Axumin, earlier than anticipated. This has companies to enter the marketplace
a prostate cancer imaging instru- resulted in a significant revaluation to increase competition.
ment that has been developed by of the company, producing a 6.4%
Blue Earth Diagnostics. uplift in Syncona's Net Asset Value Specialist opinion
(NAV) in early May.
Prostate cancer affects around 2 The healthcare sector contains a
million men in the US, of which ap- The development of radically im- wide range of companies that offer
proximately 70,000 experience re- proved diagnostic tools and treat- radically different investment oppor-
currence each year. It is absolutely ments is likely to create numerous tunities. At the large cap end of the
vital that any return of the disease is investment opportunities in the scale there are the pharmaceutical
accurately diagnosed as it could rep- healthcare and biotech sector. These stocks like AstraZeneca (LON:AZN),
resent the last opportunity to cure could be further enhanced by the GlaxoSmithKline (LON:GSK) and
it with surgery. The development of gathering pace of drug approvals in Pfizer (NYSE:PFE) with their steady
Axumin was a major breakthrough the all-important US market, with the earnings and attractive dividend
in this process as it provides dramat- Food and Drug Administration (FDA) yields. These are complemented by
ically clearer images of the location approving 46 new drugs in 2017 and the Biotech giants such as Amgen
of secondary tumours and thereby a further 15 being approved so far (NASDAQ:AMGN), Gilead Sciences
enables them to be treated more ef- this year. (NASDAQ:GILD) and Celgene
fectively. (NASDAQ:CELG) with their huge
One of the main concerns is the po- growth potential.
Oxford-based Blue Earth Diagnos- tential impact of President Trump's
tics is owned by the investment trust new policy to lower drug prices, al- There are also many smaller biotech
Syncona (LON: SYNC) and is the though the measures don't seem to businesses and start-ups with a sin-
first of their unlisted Life Sciences be as draconian as initially feared. gle product under development that
20 | ISSUE 40 – JULY 2018 Master Investor is a registered trademark of Master Investor Limited | www.masterinvestor.co.uk
FUNDS IN FOCUS
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FUNDS IN FOCUS
A key part of their strategy is to iden-
tify catalysts that will lead to a major
“THIS IS A COMPLEX AND SPECIALIST re-rating of the shares, such as a suc-
cessful clinical trial, a positive regula-
AREA WHERE A KNOWLEDGEABLE FUND tory decision by the FDA or the launch
MANAGER SHOULD BE ABLE TO ADD of a new drug.
SIGNIFICANT VALUE VIA THEIR STOCK The manager believes that the sector
SELECTION DECISIONS.” – which is largely dominated by US
stocks − will benefit from the American
tax reforms and the repatriation of off-
could produce a radical new treatment the fund managers to invest a greater shore cash and thinks that the tax cuts
or fail without trace, as well as lots of proportion of their assets in illiquid se- will lead to increased share buybacks,
more established companies providing curities such as the thinly traded small higher dividends and more M&A ac-
healthcare equipment and managed caps or the unquoted biotech busi- tivity. WWH has generated a ten-year
healthcare services. nesses that offer the greatest potential share price return of 559% and the
returns. shares are currently trading close to
This is a complex and specialist area NAV.
where a knowledgeable fund manager Safe pair of hands
should be able to add significant value Focused approach
via their stock selection decisions, but The Worldwide Healthcare Trust has
there are only a handful of investment the most diversified portfolio in the BB Healthcare (LON:BBH) raised
trusts and open-ended funds that con- sector with 75 separate holdings, of £150 million when it was floated on
centrate specifically on this part of the which the top ten account for 35% of the London Stock Exchange in Decem-
market. the assets. It was launched in April 1995 ber 2016, but subsequent share issues
and has been managed throughout by have boosted its total assets to a more
According to data from Winterflood Se- OrbiMed, a leading global healthcare meaningful £368 million. It is managed
curities, there are just six investment investor with around $14 billion of as- by Bellevue Asset Management, which
trusts operating in the sector, and be- sets under management. also runs a highly successful Swiss-
tween them they have total assets of listed closed-ended Biotech fund.
almost £4 billion. The two largest, at Sam Islay, OrbiMed's founder and
over £1 billion each, are Syncona and managing partner, announced his re- The fund managers have a high con-
the Worldwide Healthcare Trust tirement last December following al- viction 'best ideas' approach and will
(LON:WWH). Over the last five years, legations of improper behaviour, but only invest in a maximum of 35 stocks
the six funds have generated an aver- Sven Borho (see the interview on page at any given time, with no single posi-
age share price total return of 117%. 10), WWH's long-term co-manager, tion exceeding 10% of the assets. Their
remains in place, so there should be focus is on the long term, with the typ-
Investment trusts are closed-ended, little impact on the day to day run- ical investment period expected to be
with investors able to buy and sell the ning of the fund. OrbiMed is well-re- three to five years.
shares on the London Stock Exchange sourced with around 82 investment
without any cash flow implications for professionals and this enables it to BBH's maiden results for the period
the underlying holdings. This gives identify opportunities right across the from 2nd December 2016 to 30th No-
them a major advantage as it enables sector. vember 2017 were impressive, with a
NAV total return of 19.3%, which was
well ahead of the 14.4% achieved by
Open-ended funds
The largest open-ended healthcare
fund, according to FE Trustnet,
is BlackRock GF World Health-
science, with around $2.9 billion
in assets under management. At
least 70% of its portfolio is invested
in the sector and this has enabled
it to generate a creditable five-year
return of 109.9%. The biggest Bio-
tech fund is Franklin Biotechnol-
ogy Discovery, with $2.3 billion of
AUM. It has returned 110.6% over
five years.
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FUNDS IN FOCUS
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FUNDS IN FOCUS
Biotech Growth has a concentrated portfolio of 35 holdings with the top ten
accounting for 69% of the assets. It has the greatest bias towards the small cap
end of the spectrum of all the funds operating in this area and, according to
an analysis by Winterflood conducted last year, only has about a 28% portfolio
overlap with the Worldwide Healthcare Trust.
The managers have put together an exciting portfolio that consists of large bi-
otech stocks with strong earnings and attractive valuations, emerging biotech
companies with the potential to benefit from positive catalysts and early-stage
businesses that are in the process of developing novel therapeutic treatments.
BIOG has a strong long-term performance record with a share price return of 632% over the last ten years, but over
the last three years, it has lagged behind the sector average and its NASDAQ Biotechnology benchmark due to stock
specific issues. This has resulted in the shares trading on a 7% discount to NAV, which could represent a buying oppor-
tunity for long-term investors.
Fund Facts
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MASTER INVESTOR MANCHESTER
Keynote seminar with billionaire investor Jim Mellon
9 November 2018
5.15 – 9pm (after the Manchester Investor Show)
Mercure Manchester Piccadilly
REGISTER
REGISTER YOUR INTEREST> >
YOUR INTEREST
Opportunities in
small cap healthcare
As discussed elsewhere in this issue of Master Investor Magazine, the healthcare and bio-
tech sectors provide significant opportunities for investors. It is my job to provide analysis
of small cap opportunities, so before heading into my three small cap picks, here are three
pointers to look out for when investing in the medical minnows.
Firstly, small cap investors should in March 2014. The shares subse- ers' research is ultimately successful.
avoid having too much portfolio ex- quently collapsed after a Phase III One particular business doing well in
posure to companies whose fortunes study in 2016 reported that its cat al- this area is antibody developer Bio-
rely heavily upon the success of just lergy drug candidate performed no ventix (LON:BVXP), shares in which
one drug candidate. Some readers better than a placebo. have risen from 520p to 2,978p since
may remember London listed scar listing on AIM in April 2014.
reduction company Renovo, whose Another top tip is to consider a "picks
shares collapsed by 75% in just one and shovels" strategy by investing in Noting the points above, here are
day in 2011 after announcing that areas such as diagnostics and bio- three interesting small cap health-
trials of its flagship product Juvista tech/healthcare service providers. care/biotech businesses which I be-
were unsuccessful. More recently, These companies will earn money lieve are worthy of further investiga-
shares in Faron Pharmaceuticals regardless of whether their custom- tion.
(LON:FARN) collapsed by 86% in one
day after data from a Phase III study
of its vascular leakage and organ fail-
ure candidate Traumakine showed it
did not meet its primary endpoint.
Remember that while management
may be "optimistic" about the pros-
pects of a drug candidate, and that
earlier stage trials may have been
positive, the key for success is in the
Phase III data.
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FROM ACORNS TO OAK TREES
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FROM ACORNS TO OAK TREES
“POLAREAN
IS CURRENTLY
TARGETING
FDA APPROVAL
DURING 2020.”
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FROM ACORNS TO OAK TREES
Polarean 9820 Xenon Hyperpolariser;
HPX gas, which is polarised within
the polariser; the dose delivery inha-
lation bag, made of HPX-compatible
impermeable plastic materials and
a mouthpiece for ease of inhalation;
and the Polarean 2881 Polarisation
Measurement Station, which provides
a calibrated measurement of the po-
larisation of hyperpolarised gas within
the dose delivery inhalation bag. The
company also develops and manufac-
tures high performance MRI radiofre-
quency (RF) coils which are a required
component for imaging 129Xe in the
MRI system.
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FROM ACORNS TO OAK TREES
Decent growth continued in the first strategy continuing to focus on attrac-
half of the current financial year, with tive bolt-on acquisitions, along with po-
revenues growing by 11.2% to £87.6 tentially larger deals.
million in the six months to March
2018 as net capacity edged up to 2,572 MEDICA GROUP
places. Underlying EBITDA increased
by 6.6% to £19.5 million although earn- Medica Group (LON:MGP) is the UK
ings fell to 9.2% to 14.86p, largely as market leader by revenue in the pro-
a result of the increased number of vision of teleradiology services. Telera-
shares in issue following the placing. diology refers to the electronic trans-
Growth over the years has been driven Nevertheless, the interim dividend was mission of radiological patient images,
by a number of factors including in- increased by 6.1% to 3.5p per share, such as x-rays, Computerised Tomog-
creased outsourcing by local author- with net assets growing by 6.7% to raphy (CT) scans and MRI scans, from
ities, shortfalls of specialist beds and £208.3 million at the period end. one location to another for the pur-
higher regulatory burdens. But despite poses of diagnostic interpretation and
annual revenues having grown from Time to top up? reporting. Through teleradiology, im-
£22.5 million to £166 million from 2005 ages can be transmitted from parties
to 2017, CareTech still only has a small Since reaching an all time high of over that undertake the diagnostic imaging
share of what is a fragmented market 450p last June, shares in CareTech itself, such as a hospital, to a radiolo-
for social care in the UK, estimated by have drifted down to the current 387p gist who can review and report on the
the company to be worth c.£12.6 bil- despite the company's operations images remotely.
lion per annum. ticking on nicely. At the current price
the company trades on a historic
Care to grow price to earnings multiple of just 10.2
times, which looks incredibly cheap in “REVENUES
In 2017 (the 12 months to September)
CareTech had a strong financial year,
my opinion given the company's track
record of growth and solid business
GREW BY A CAGR
with the corporate highlight being the model. What's more the historic divi- OF 27% BETWEEN
raising of £39 million in a "very over- dend yield is a reasonable 2.56%, with
subscribed" placing of new shares. the current market cap of £292 mil- 2013 AND 2015.”
The money was spent on acquiring lion supported by the £208.3 million
new additions to the care home port- of net assets on the balance sheet as
folio. Overall capacity increased by 215 at the end of March this year. This in- In the UK, the NHS is the main player
places to 2,534 by the period end. On cluded £300 million worth of property in what is a growing teleradiology mar-
the back of that, revenues for the year assets. ket. The Royal College of Radiologists,
rose by 11.4% to a record high of £166 for example, has forecast for England
million, with underlying EBITDA up by Assuming access to finance is not a that CT scans will continue to grow at a
7.5% at £39.9 million. As a result, the problem, I believe that the company CAGR of 10.1% between April 2014 and
total dividend for 2017 was up by 7% at can continue to grow market share March 2023 and that MRI scans will
9.9p per share. over the coming years, with the current continue to grow at a CAGR of 12.3%
over the same period. This increased
number of scans, combined with a
shortfall in the supply of radiologists,
means that the teleradiology services
offered by Medica are increasingly in
demand.
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FROM ACORNS TO OAK TREES
Double-digit growth
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BY JAMES FAULKNER
James Faulkner: To begin, can you number of partnerships, including with Gilead's YescartaTM, Spark's LuxturnaTM
give our readers a brief overview of Novartis, Bioverativ, Sanofi, Axovant, and Novartis's KymriahTM.
Oxford BioMedica and its areas of Orchard Therapeutics, GC LabCell and
expertise? Immune Design, through which it has Oxford BioMedica is exploiting its Len-
long-term economic interests in other tiVector® platform to develop its own
John Dawson: Oxford BioMedica is potential gene and cell therapy prod- products and to build partnerships with
a leading gene and cell therapy group ucts. Oxford BioMedica is based across other companies working with lentiviral
focused on developing life changing several locations in Oxfordshire and em- vector products. The platform is applica-
treatments for serious diseases. Oxford ploys more than 320 people. ble in many therapeutic areas and has a
BioMedica and its subsidiaries have built number of specific advantages. Lentiviral
a sector leading lentiviral vector deliv- JF: How does a gene-based therapy vectors can genetically modify dividing
ery platform (LentiVector®), which the differ from conventional medicines cells, such as T-cells, as well as non- or
Group leverages to develop in vivo and and why is it superior? rarely dividing cells, such as neurons or
ex vivo products both in-house and with early progenitor/stem cells, making it a
partners. JD: Gene and cell therapy has the po- delivery system of choice in gene and cell
tential to transform medicine, providing therapy.
The Group has created a valuable pro- long term and potentially curative treat-
prietary portfolio of gene and cell ther- ment options for a wide range of dis- The platform can also integrate genes
apy product candidates in the areas eases. Several highly promising cell and into non-dividing cells, including in the
of oncology, ophthalmology and CNS gene therapies have been launched re- brain and retina, with ground-breaking
disorders. We have also entered into a cently, including GSK's StrimvelisTM, Kite/ long-term studies suggesting gene ex-
John Dawson joined Oxford BioMedica's Board as Non-Executive Director in August 2008 and he was appointed Chief
Executive Officer in October 2008. Previously, he held senior management positions in the European operations of
Cephalon Inc., including Chief Financial Officer and Head of Business Development Europe. While at Cephalon he led
many deals building the European business to over 1,000 people, and to a turnover of several hundred million US
dollars and in 2005 led the US$360 million acquisition of Zeneus by Cephalon. Prior to this time at Cephalon he was
Director of Finance and Administration of Serono Laboratories (UK) Limited. He is currently a non-executive director
of Paion AG.
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MOVERS AND SHAKERS
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MOVERS AND SHAKERS
pression may be maintained indefinitely, JF: In your latest results you said JF: June saw a big spike in the share
offering the prospect of permanent ther- that lentiviral vector demand was price on the back of the announce-
apeutic benefit following a single admin- increasing and that the group was ment of a $842.5 million deal with
istration. The platform is also used as a in discussions regarding a range of Axovant Sciences of the US to com-
valuable research tool, with applications additional collaborations. Where do mercialise the firm's gene therapy
in transgenesis, stem cell manipulation, you see the main areas of applica- for Parkinson's disease. But given
somatic disease models, target valida- tion for this technology, other than that Axovant has had a rather tu-
tion and gene discovery. those currently being addressed? multuous past of late, is it really the
right candidate to receive what you
JF: The approval of Kymriah, which JD: Our technology is applicable in many yourself have called "the crown jew-
is being developed by Novartis, was therapeutic areas and has a number of els" of your portfolio?
a major milestone for the group. specific advantages. Lentiviral vectors
Some commentators criticised you can genetically modify dividing cells, JD: They have had a number of unfor-
for being too dependent on the No- such as T-cells, as well as non- or rarely tunate setbacks, as do most companies
vartis deal. But do you think the dividing cells, such as neurons or early in drug development, but we believe Ax-
string of deals of late will put those progenitor/stem cells, making it a de- ovant are the best partner for OXB-102.
criticisms to bed? livery system of choice in gene and cell We were in discussions with a number of
therapy. The platform can also integrate potential partners and we had to pick the
JD: Novartis has been an important part- genes into non-dividing cells, including in best partner for OXB-102 for all our stake-
ner for many years, but we have been the brain and retina, with ground-break- holders and patients, based on a number
signing agreements with many other ing long-term studies suggesting gene ex- of factors, including commitment to the
companies, including, Sanofi, Orchard pression may be maintained indefinitely, product and financial terms, and we look
Therapeutics, GC LabCell and Immune offering the prospect of permanent ther- forward to working with them.
Design. More recently, in 2018 we also apeutic benefit following a single admin-
signed agreements with Bioverativ and istration. Axovant are focused on neurological dis-
Axovant. orders, so OXB-102 fits directly into their
field of focus and expertise. OXB-102 will
I would say that the approval of Kymriah “WE HAVE now be one of their lead pipeline assets,
has put the area of gene and cell therapy and whilst we would encourage you to
HAD A SURGE ask Axovant about their motivations, the
at the forefront of the sector's mind, and
since then we have had a surge in com- IN COMPANIES deal terms give an idea of their commit-
panies wanting to work with us. This has WANTING TO WORK ment, enthusiasm and optimism for OXB-
meant we have been able to raise addi- WITH US.” 102.
tional funds in the market to further ex-
pand our facilities in order to cope with JF: Is there any likelihood of licens-
the expected increase in demand. With the increased yield and rates of ing the TRiP (Transgene Repression
production due to larger reactors and in vector Production) system to any-
We are leaders in gene and cell therapy our proprietary TRiP technology, as one anytime soon? If so, what might
and so we have had discussions with the well as the potential to reduce the cost such a deal be worth?
whole sector and partnerships in place of production, we will be able to target
for many years – it is only now though new gene therapies that require larger JD: We are exploring the best ways to use
that gene therapy is really happening, volumes of vector – for example, lung or the TRiP technology and if there were at-
treating patients and here to stay. liver. tractive proposals to license the technol-
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MOVERS AND SHAKERS
About James
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BY FILIPE R. COSTA
How to invest
for an ageing
population
"The aging and declining population will have far-reaching impacts. Declining fertility rates will pos-
sibly increase immigration. The structure of family and society will inevitably change."
Human life expectancy is on a seem- growth levels, savings levels, and the particular). While governments and
ingly inexorable ascent. From a whole sustainability of our way of academics discuss the best ways to
meagre 50 years one century ago, living. tackle the problems created by the
life expectancy in the US has been new demographic trends, investors
extended to almost 80 years today, An increase in life expectancy is ap- should start tweaking their portfo-
and to even more in the UK and Ja- parently harmless. It only becomes lios to profit from them.
pan. Improving levels of knowledge, a serious threat when mixed with a
education, health and living con- second demographic phenomenon Demographic trends
ditions have all helped extend our – a decrease in fertility rates. If peo-
expected life beyond levels that a ple live longer and work longer, the The world has witnessed a spectacu-
century ago seemed unattainable. population may become older with- lar increase in life expectancy. Since
Unlike the stock market and the real out any material consequences. The 1960, around 10 years have been
economy, which frequently suffer real problem arises when fertility added to life expectancy in the de-
from ups and downs, life expectancy rates come down, such that they be- veloped world. In the United States,
seems to be on a relentless uptrend, come lower than replacement rates. a person was expected to live 69.8
possibly until humanity attains im- When that happens, the population years in 1960, 75.2 years in 1990,
mortality. starts ageing and the ratio of retirees and 78.7 years by the end of 2016.
to young people starts rising. Such In the UK, the trend was similar and
While this is certainly good news for a demographic trend is far-reach- life expectancy is now held at 81.0.
our survival instincts, it comes with ing and delivers long-lasting effects In Japan, the trend has been even
severe challenges for social secu- for society (in general), and for the more spectacular, with people now
rity schemes, labour productivity, economy and the stock market (in expected to live for 84 years. In less
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THE MACRO INVESTOR
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THE MACRO INVESTOR
than half a century, life expectancy has life expectancy in the period, a figure more promising, with women in Japan
increased by 24% in Japan. that is almost quadruple that recorded expected to live 86.8 years.
in high income countries. People in
But, contrary to popular belief, this low income countries now live an ad- We have been particularly good at con-
trend is not just a developed-world ditional 23 years on top of what they trolling contagious diseases, at improv-
phenomenon. When we take the whole were expected to live in 1960. ing healthcare conditions, at reducing
world together, we can observe that the impact of ongoing wars and at ex-
life expectancy rose from 52.6 years The rise in life expectancy has been panding food production. All this has
in 1960 to 72 years today – a 37% rise, huge. Countries with the highest had a very positive effect on life expec-
which is steeper than the trend expe- standard of living now show life expec- tancy.
rienced by Japan. Low income coun- tancy values above 80 years. If we look
tries observed an increase of 60% in at gender data, the numbers are even The problem with ageing
populations
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THE MACRO INVESTOR
small living spaces – these are some
of the demographic and social trends
that have reduced the desirability of
raising a child. In some way or another,
these trends increase the opportunity
cost of raising a child. At the same
time, the real money available to raise
a child seems to have decreased over
time. A decline in wages and lifetime
employment and a lack of regular em-
ployment are often pointed to on that
front.
“THE WORLD
IS NEARING AN
INVERSION POINT
IN TERMS OF THE
SAVINGS RATE.”
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THE MACRO INVESTOR
An interesting smaller company, which
I already mentioned in the April edition
of Master Investor, and related with
the robotisation of the economy, is In-
tuitive Surgical (NASDAQ:ISRG). The
company is a developer of a robotic
surgical system for soft tissue proce-
dures. The system is precise and thus
needs smaller incisions which heal
quicker. The elderly often need small
interventions, which may be safer
when using this kind of procedure.
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THE MACRO INVESTOR
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BY ANDY SMITH
The reality of
drug pricing
In a quote that has been attributed to Oscar Wilde, it is suggested that a cynic is someone
who knows the price of everything, but the value of nothing. With all the political rhetoric
on drug pricing that seesawed biotechnology and pharmaceutical share prices during the US
presidential election, not to mention an imminent presidential initiative on US drug pric-
ing, companies and investors cannot afford to be cynical.
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THE REALITY OF DRUG PRICING
In a study I did last year looking at a rabbit out of the hat for a few pa-
the full-year 2016 sales of drugs tients. How much the companies
approved by the FDA and EMA five “THE PRICING AND developing these drugs can charge,
years after launch, 19% of drugs ap- REIMBURSEMENT and whether or not they will be re-
proved by the FDA and a whopping imbursed by private or public US
46% of drugs approved by the EMA OF DRUGS IS THE payers, are little details that, to date,
had sales of less than $20 million in NEW HURDLE TO seem to have been overlooked.
that fifth year. For all but the most OVERCOME FOR
frugal (or not-for-profit) companies, In both cases then – for drugs that
this would probably mean perma- PHARMACEUTICAL are approved and for access to drugs
nent loss-making status and that COMPANIES.” under the RTT legislation – access
would not be what their investors to patients by regulatory approval
would be hoping for unless they are or RTT legislation is much less of a
short the stock. is the right to try (RTT) legislation. barrier to commercialisation than it
This allows patients to try drugs that used to be. However, the pricing and
The other recent politically-medi- are not yet approved in the end- reimbursement of drugs is the new
tated intervention of relevance to stages of their disease in the hope hurdle to overcome for pharmaceu-
drug and biotechnology companies that these unproven drugs may pull tical companies.
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THE REALITY OF DRUG PRICING
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THE REALITY OF DRUG PRICING
their cost is, and this is just one of the only help. Many smaller biotech com- Edison clients, the cost will be much
questions that are asked of payers in a panies would have been put off by the more reasonable than engaging in a
pricing and market access study. high cost of employing a pricing and full-blown consultancy project.
market access consultancy to provide
These studies involve finding suitable them with this important information, When I first started as an investor in
payers who are active and have a his- but fortunately help is at hand. 2000, my heart used to sink whenever
tory of making reimbursement deci- I read the phrase 'in the Directors'
sions. For hospital products, this can After working as a principle in a pric- opinion' as a qualification on how big
mean discussions with pharmacists ing and market access consultancy, I the market was for their lead drug, be-
or hospital administrators who are moved to Edison Investment Research cause that was all it was: an opinion.
on Pharmacy and Therapeutics com- in 2017. Judging from discussions with For about 17 years as an investor, I
mittees. In the US, whether the drug our clients that were close to either the had the same feeling when I read the
is prescribed in the community or in market or Phase III, the importance of caveat 'in our view' in investment bank
hospitals, medical directors from both such studies was appreciated. In the research, which was also a qualifier for
public (Medicare, Medicaid and the spring of 2018, we completed our first a number plucked out of thin air. Now,
VA) and private (health management pricing and market access study for an thanks to our ability to conduct pricing
organisations and healthcare insur- Edison client using the same method- and market access studies for Edison
ers) are consulted, since both have ologies and generating the same out- Investment Research clients, our cli-
committees in which clinical data are puts as have been discussed above ents, their investors and their potential
discussed and pricing and reimburse- conducted with US respondents. Be- licensors can have a better objective
ment decisions are made. cause the clients for these studies are valuation for a reasonable price.
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BY VICTOR HILL
opportunities in focus
The scale of cyber-warfare already in play is much underestimated. Firstly, the vast ma-
jority of cyber-attacks on governments and businesses are never reported but are rather
hushed up in order to avoid reputational damage or political or legal repercussions. Sec-
ondly, there is no universal definition of what a cyber-attack is; nor are there universally
agreed measures of how much damage each one does.
Last month, I considered how the Big 5 US technology companies had established them-
selves as huge depositories of data – much of it about us, the people who use their products
and services – and how they had also become Artificial Intelligence (AI) hubs.
This month, I want to show how the US government regards these five Silicon Valley corpo-
rations as part of its national security apparatus. The revelations made by Edward Snowden
(who was probably working for the Russians all along) via WikiLeaks back in 2013, fuelled
a debate about mass surveillance which, though abated, is still ongoing. The relationship
between US security services and the Big 5 poses delicate questions about the balance of
security and privacy in a dangerous world.
But the US is not alone, even if its technology is the most advanced. All major powers are
gearing up for, if not a global cyber-war, a succession of cyber-battles, each of which could
have a negative impact on your wealth.
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OPPORTUNITIES IN FOCUS
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OPPORTUNITIES IN FOCUS
The weapons of
cyberwarfare
Both the Republicans and the Dem-
ocrats in the United States, as well as
numerous other political parties else-
where, have employed data analytics
to target ads at swing voters during
recent elections. There is absolutely
nothing illegal about this – it is just the
digital equivalent of canvassing vot-
ers in marginal wards by knocking on
doors, which all British political parties
have been doing for many years.
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OPPORTUNITIES IN FOCUS
nary people, or possibly, to undermine War – and quite possibly as dangerous
their morale and resolve. for humanity. Algorithms owned, de- Corporate governance
veloped and deployed by a relatively issues
Again, the idea behind it is not new. few large corporations determine (a)
Nazi Germany tried to scare ordinary the results of our web searches; (b) the Even though Facebook and Google
Britons with the wartime broadcasts of posts and news stories featured in our are publicly traded companies,
William Joyce – "Lord Haw Haw" whose social media feeds; not to mention (c) their founders can out-vote any-
catchphrase was Germany calling…Not the targeted ads, to which we are all one else. Mr Zuckerberg controls
that it had any effect on the plucky Brits exposed continuously. 60 percent of the voting stock
who, so it is said, found these broad- at Facebook. Messrs Brin and
casts absurd. (Nonetheless, Joyce was Facebook (NASDAQ:FB) estimated in Page control more than 50 per-
captured and hanged after the War for April that 11.4 million Americans saw cent of the voting stock at Alpha-
treason.) advertisements that had been paid bet-Google. So, total control, then.
for by Russian parties in an attempt They are not only billionaires but
Information wars to sway the 2016 election in favour of corporate dictators.
Mr Trump. A further 126 million peo-
The information warfare of today is po- ple, Facebook disclosed, were exposed
tentially hugely more subtle and effec- to posts by Facebook groups used by more susceptible to unfounded allega-
tive than Dr Goebbels, the head of Nazi Russia. Twitter (NYSE:TWTR) also tions.
propaganda, could have dreamed. In fears that its users may have been sub-
his book, The Darkening Web: The War jected to fake news by Trojan accounts In May 2011 the administration of
for Cyberspace, Alexander Klimburgi run from Russia. But then a prominent President Barack Obama unveiled
contends that the internet is already Twitter devotee – one Donald J Trump something called the International
the main stage for confrontation be- – uses Twitter to accuse others of fake Strategy for Cyberspace. This document
tween states. In this new arena of news on an almost daily basis. postulated that the internet was a
conflict, brilliant individual minds and space where "the norms of responsi-
informal networks have the capacity Mr Klimburg argues that citizens in ble, just and peaceful conduct amongst
to bring ostensibly stable societies to Western democracies are especially states and people have begun to take
their knees. vulnerable to information wars of this hold". But, after Edward Snowden's
kind. Opinion polls in the USA, the UK revelations about snooping by US in-
Mr Klimburg thinks that competition and elsewhere show that ordinary cit- telligence agencies in 2013, the Obama
for cyber-power is a development as izens have declining faith in their na- administration became more defen-
complex and troubling as the advent tional institutions and in the probity sive. Policy advisers argued that the
of nuclear weapons during the Cold of their politicians. This makes them US should define itself as an advocate
of a free internet in contradistinction
to cyber-sovereignty adherents such as
Russia and China, which aim to control
“COMPETITION FOR CYBER-POWER the influence of the internet over their
IS A DEVELOPMENT AS COMPLEX citizens' thought processes.
AND TROUBLING AS THE ADVENT OF Cyber-attacks against Iran
NUCLEAR WEAPONS DURING THE
Mr Klimburg takes issue with the offi-
COLD WAR – AND QUITE POSSIBLY AS cial US view. He thinks that America's
DANGEROUS FOR HUMANITY.” military has always understood the
psychological hold of the internet and
has wished to dominate it. About a year
before Mr Obama's International Strat-
egy for Cyberspace, Russia's Kaspersky
Lab acquired the Stuxnet virus. This
malware, it is alleged, was originally
developed by the US and Israel to dis-
rupt Iran's efforts to develop a nuclear
weapon by corrupting the control sys-
tems in Iran's centrifuges (used to pu-
rify nuclear fuel). Supposedly, this virus
caused Iran's centrifuges to malfunc-
tion and even explode – but, inevitably,
it spread to other countries.
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OPPORTUNITIES IN FOCUS
Iran. He organised hit teams who blew bend or blinker opinion. Mr Klimburg chains and power supplies. He was
up the cars of Iranian nuclear scientists is more worried about states using the particularly concerned about the vul-
as they set off to work. Fake companies internet for their own purposes than nerability of the City of London and the
were established in Eastern Europe to the Silicon Valley giants, despite the power generation industry.
sell defective equipment to Iranian latter's worrying lack of transparency.
agents. Cargo planes mysteriously Mr Hannigan ran GCHQ until 2017
blew up. And – most effective of all – On 07 June former British intelligence and now chairs the cyber-security firm
the Stuxnet virus struck. Incidentally, chief Robert Hannigan told the Infose- BlueVoyant Europe.
it is worth noting that, in retirement, curity Europe conference at Olympia in
Meir Dagan was a vocal opponent of London that Iran had already launched Deep states
Mr Netanyahu's advocacy of an Israeli cyber-attacks on the UK. That country
first-strike against Iranii. is likely to launch renewed attacks fur- The internet as it developed in the USA
ther to President Trump's decision to owes much to the Defence Advanced
In covering its tracks, the US – and pos- pull out of the 2015 accord with Iran, Research Projects Agency (DARPA).
sibly other Western states – has used to which Britain is a party. He fears This is a government agency within
the same information war tactics to attacks on household routers, supply the US Department for Defence which
has been charged with the task of de-
veloping new technologies of use to
Information Wars: the a given audience. It employs mobile the military. DARPA boasts that it has
Koch Brothers and i360 ID matching which can link individu- been instrumental in both speech rec-
als to all the devices they use – unlike ognition technology and AI. But then it
The US data analytics company, i360, cookies which link a user to a given is a cliché that much of modern tech-
is owned by the Koch family, owners device. i360 has worked closely with nology is simply the commercialisation
of Koch Industries, reportedly the both Google (for its DoubleClick ap- of military innovations. Weren't Teflon
second largest private company in plication) and with Facebook. non-stick frying pans supposed to be a
the USA. They are known to be im- spin-off from NASA's moon project?
portant donors to conservative and The Koch family are accused in the
Republican causes. US of using their online influence to What is of interest to investors is that
promote scepticism about anthro- DARPA offers early-stage funding to re-
i360 has allegedly spent years devel- pogenic climate change. Some com- searchers to develop new technologies
oping profiles of an estimated 250 mentators think that the firm wants for national security purposes. Then
million American citizens and using to develop a comprehensive strat- the US government invests in com-
this data to determine what kinds of egy to influence voters before this panies that can commercialise these
advertisement will have traction with year's mid-term elections. technologies. Driverless cars – sched-
uled to arrive soon – will utilise tech-
nologies first used by the military in
missile guidance systems and drones.
Some smartphones now employ facial
recognition technology developed by
special intelligence.
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OPPORTUNITIES IN FOCUS
gain. There is also the fear that foreign unless they paid a sum of Bitcoin then
Cyber-wars: US versus parties could buy into this technology. equal to about US$300.
China
Out of the Big 5, Apple (NAS- The advance of the malware across
It was reported in June that Chi- DAQ:AAPL) has the lowest R&D the planet was slowed when a British
nese hackers stole data from a budget. The company has largely suc- White Hat hacker stumbled upon a "kill
US navy contractor, including ceeded by integrating other people's switch". The brilliant young hero who
plans for submarine-launched su- technology into aesthetically designed was known on Twitter as Malware Tech
personic anti-ship missiles. The products. Yet, as is well known, Apple's worked out that every time WannaCry
breaches took place in January and tax management practices have been runs, it pings a request to a non-exist-
February this year, US officials told sharp, sheltering most of its income in ent address (URL) in cyber-space. This
The Washington Post. Ireland and holding huge cash reserves was intended to verify that the mal-
in other offshore jurisdictions. At least ware is genuinely inside a new com-
until now, that is (given Mr Trump's tax puter and is not contained within a
Most readers of this article will already reforms). cyber-security "sandbox". (Sandboxes
be users of one of In-Q-Tel's great- simulate the internet in such a way
est achievements – Google Earth. This Hackers: Black Hats or as to convince the malware to reveal
began life as a 3-D mapping start-up White Hats? its evil intentions). If the ping returns
owned by the National Geospatial In- from the non-existent web address
telligence Agency. Frame, the cloud In my article in the June 2017 edition then the malware works out that it is
computing pioneer was jointly fi- of the MI magazine I focussed on the in a "sandbox" – and then immediately
nanced by In-Q-Tel, Microsoft and Bain massive WannaCry ransomware cy- shuts down so as not reveal anything
Capital Ventures. Infinite Z, another ber-attack that struck 100 countries about itself.
beneficiary of seed capital from In-Q- around the world on 12 May 2017 –
Tel is enabling computers to interact widely recalled as Black Cyber Friday. Malware Tech identified the non-ex-
with 3-D holographic images. Aquifi Amongst others, NHS hospitals were istent web address in question, regis-
is producing scanners that can create threatened with computer meltdown tered the domain name (at a cost of
a colour 3-D model of any scanned
image.
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OPPORTUNITIES IN FOCUS
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OPPORTUNITIES IN FOCUS
Cyber-security champions
In the article of 13 months ago I suggested that there were a number of listed niche players in cyber-security whose
shares would be worth watching. How did they fare? In a word: disappointingly.
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OPPORTUNITIES IN FOCUS
F-Secure Oyj (HEL:FSC1V) is a Finnish cyber security company based in Helsinki, Finland. The company has 20 country
offices and a presence in more than 100 countries, with Security Lab operations in Helsinki and in Kuala Lumpur, Ma-
laysia. Through more than 200 partners globally, millions of broadband customers use F-Secure services. Its flagship
vulnerability scanning products are Radar Managed Services and its Rapid Detection Service. F-Secure is listed on the
Helsinki Stock Exchange. Its shares have traded in the €3.50-€5 range over the last 12 months, exhibiting great volatility.
Stuart Peach, used his farewell address In May, Dr Mahathir Mohammed (then grammed and then flown to a secret
to say that he was "quite relaxed" with an opposition leader but now the 92- location.
the idea of recruiting troops with first year old Prime Minister of Malaysia)
class cyber-warfare skills who would told The Australian newspaper that A twist to the mystery is that MH370
never see front-line action. Such ser- it was possible that the aircraft had was carrying at least four (some web-
vicemen and women wouldn't be re- been hijacked "remotely"v. This is one sites say 20) employees of Freescale
quired to meet the UK armed forces' of many conspiracy theories that have Semiconductor – a company that may
rigorous fitness tests. been circulating on the internet for have worked with the US National Se-
years – but Dr Mahathir is the first poli- curity Agency (NSA) to develop surveil-
A recurring nightmare: tician to have endorsed it publicly. lance technology, according to Edward
could hackers wrest Snowden's revelations. Freescale was
control of an airliner? In his book Beneath Another Sky: A acquired by NXP Semiconductors of
Global Journey into History, the dis- the Netherlands in December 2015.
The mystery of flight MH370 has tinguished Oxford historian Norman
never been resolved. Readers will re- Davies argues that technology de- In response to these concerns Air-
call that a Malaysia Airlines (private) signed to prevent another 9/11-style bus (EPA:AIR) and Boeing (NYSE:BA)
flight scheduled from Kuala Lumpur terror attack by allowing planes to have attempted to install real-time
to Beijing on 08 March 2014 mysteri- be controlled remotely could have warnings for pilots about perceived
ously disappeared – almost without been exploited by cyber-spooks. He hacking attempts in their aircraft. Re-
trace. A few scattered fragments of suggests that MH370, which was portedly, Airbus has engaged Thales
the aircraft have been found including equipped with Boeing's Honeywell Un- SA (EPA:HO) and Raytheon Company
a flaperon washed up on a beach on interruptible Autopilot on-board com- (NYSE:RTN)vi. Cockpit equipment that
Reunion Island. puter, could have been hacked, repro- could be a target for hackers is manu-
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OPPORTUNITIES IN FOCUS
factured by Honeywell International should hold at least one cyber-security risks to which potential investments
(NYSE:HON) and Rockwell Collins stock. Also, keen tech investors should are exposed. UK energy stocks seem
(NYSE:COL). keep an eye on where In-Q-Tel invests to be at higher risk than others – and
– all its holdings are listed on its web- this should be reflected in their share
Airlines are also increasingly aware site. prices.
that they are vulnerable during main-
tenance operations which allow third This year I would go further. As part of Finally – don't forget to ensure that
parties to gain access to their aircraft. their due diligence professional inves- your own computer systems are ade-
In early June the US Department of tors should assess the cyber-security quately protected!
Homeland Security (DHS) reportedly
told a group of experts that a cyber-at-
tack on a commercial aircraft was "only
a matter of time"vii. Panasonic Corpo-
ration (TYO: 6752) issued a statement
to the effect that hackers could never
gain access to flight controls through
their on-board entertainment systems.
Action
i Alexander Klimburg is a former fellow of the Belfer Center for Science and International Affairs at
Harvard University.
ii See: Israel must decide how it wants to fight Iran, by Roger Boyes, The Times, 06 June 2018.
iii Associate Professor at New York University. Her review of Alexander Klimburg's book in the New
York Review of Books prompted me to buy the book.
iv See: https://www.bbc.co.uk/news/technology-44398032
v See: http://www.theweek.co.uk/mh370/58037/mh370-conspiracy-theories-what-happened-to-the-
missing-plane
vi See: Wall Street Journal, 23 June 2017, New Push to Warn Pilots on Hacks, by Andy Paztor.
vii See: https://www.independent.co.uk/life-style/gadgets-and-tech/news/cyber-attack-aircraft-hack-
dhs-a8389941.html
viii See: http://www.hl.co.uk/shares/shares-search-results/m/micro-focus-international-plc-ord-gbp0.10/
broker-forecasts
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BY JOHN KINGHAM
dividend hunter
3 High Yield
Capital-Light
Compounders
Most investors understand the magic of compound interest. Just put your money into a
high yield investment, reinvest the income at similarly high rates of return and watch the
value of your investment grow exponentially. One nice feature of the stock market is that
you don't even have to reinvest your income to benefit from compound interest. That's
because most companies retain a significant portion of their profits even after dividends
have been paid. Those retained profits are then re-invested in the business, compounding
profits even if you use dividends for income.
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DIVIDEND HUNTER
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DIVIDEND HUNTER
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DIVIDEND HUNTER
ditional revenue without needing to
have additional capital. It also helps
Admiral build scale more quickly, and
scale is absolutely necessary if you're
going to be profitable as a low-cost
insurer. Another trick is to run insur-
ance price comparison websites such
as confused.com and compare.com
(a newer US-based alternative). These
not only acts as a route to market for
Admiral by disrupting sleepy insurance
broker-based markets, but they also
generate a useful amount of non-in-
surance returns from other insurers
who are on the platform.
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DIVIDEND HUNTER
advertise and it doesn't have an em-
ployed sales force; instead, existing
“RETAILERS AREN’T EXACTLY THE members of the club (i.e. customers)
FLAVOUR OF THE MONTH AT THE MOMENT, can become Partners and earn an in-
come by bringing new members into
WHICH IS WHY DUNELM HAS A DIVIDEND the club. This is effectively a multi-level
YIELD OF ALMOST 5%, DESPITE ITS or network marketing system, where
Partners earn a percentage of the rev-
HIGH PROFITABILITY, LOW DEBTS AND enues generated by members they
IMPRESSIVE GROWTH RATE.” bring into the club. If those new mem-
bers go on to become Partners and in-
troduce yet more members, then the
Dunelm. Both those companies are pipes and wires owned and operated original Partner earns a percentage of
generally thought of as extremely effi- by other companies, and the same those revenues too.
cient operators, so I think the standard goes for its phone and broadband ser-
ROCE ratio works just fine (or at least vices. And as far as I can tell, even its This is a legitimate business model,
that's what I'll think, until its proven insurance services are provided by an- but it does sound a bit like a Ponzi or
otherwise). other company. Pyramid Scheme and it has had a lot
of bad press recently, especially with
Of course, retailers aren't exactly the So, what does Telecom Plus actually Herbalife (the world's largest nutrition
flavour of the month at the moment, do? It provides the necessary custom- network marketing business) receiving
which is why Dunelm has a dividend er-facing services. It has a sales force a $200 million fine for operating as a
yield of almost 5%, despite its high (which I'll comment on in a moment), pyramid scheme. There is a difference
profitability, low debts and impressive a customer support team and it sends though. Telecom Plus's compensation
growth rate. Mr Market is very pessi- out bills and accepts payments. So, it structure incentivises Partners to sell
mistic about UK cyclicals, particularly does all of the customer-facing activ- services to customers, whereas Herb-
retailers, at the moment, but Mr Mar- ities, but the actual service – the gas, alife's compensation structure incenti-
ket has a long track record of occasion- electricity or insurance – is provided by vised their version of Partners to sim-
ally being very wrong and this could other companies. ply bring in more Partners rather than
well be one of those times. customers who actually use the end
The second thing that makes the "Util- product (e.g. electricity or broadband
Like Admiral, Dunelm is another com- ity Warehouse" different is that it's run in the case of Telecom Plus, nutrition
pany I've owned for a few years and, as a discount club. As a club it doesn't products in the case of Herbalife).
as things stand today, I expect to be a
shareholder for at least a few more.
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DIVIDEND HUNTER
So why is Telecom Plus such a capital
light company? The main reason is that
it doesn't build or own any energy or “AS LONG AS TELECOM PLUS CAN
telecoms infrastructure. Vodafone
(which I also own) has recently paid out
PROVIDE THE NON-INFRASTRUCTURE-
vast sums of money to build a leading RELATED SERVICES (I.E. THOSE
4G network, and that will soon have to CUSTOMER-FACING SERVICES) MORE
be upgraded to 5G. That will then have
to be upgraded to 6G and the cycle of CHEAPLY THAN THE INFRASTRUCTURE
heavy investment in expensive physi- OWNER, IT CAN UNDERCUT THEM ON
cal infrastructure goes on, seemingly
without end.
PRICING.”
About John
John Kingham is the managing editor of UK Value Investor, the investment newsletter
for defensive value investors which he began publishing in 2011. With a professional
background in insurance software analysis, John's approach to high yield, low risk
investing is based on the Benjamin Graham tradition of being systematic and fact-
based, rather than speculative.
John is also the author of The Defensive Value Investor: A Complete Step-By-Step Guide to
Building a High Yield, Low Risk Share Portfolio.
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BY DAVID JONES
chart navigator
An automated
approach for picking
recovery shares
There has been much talk in recent years about the effect that robots are going to have on
our working lives. Some have painted a somewhat scary view of the future – with the late
Stephen Hawking telling WIRED magazine that he believes artificial intelligence will even-
tually become so advanced it will essentially be a "new form of life that will outperform
humans."
We are not there yet, but plenty has column. There is no reason why you – but a lot of the time the investor
been written about the advancement cannot automate some of the don- learns to realise that the share price
of automated techniques in financial key work of picking potential invest- was falling for a reason and this con-
markets: from "robo-advisors" trying ments – and you don't need to be a tinues, and the losses mount up.
to balance the risks in your pension, rocket scientist to do it.
to algorithms reading the news and But even the most dyed-in-the wool
executing high-frequency trades in Defining the start of a chartist recognises that trends do
nanoseconds. recovery not go on forever – to mangle a fa-
mous market saying: the trend is
Those of us of a certain age are I often write in the magazine about your friend – apart from the bend at
maybe still a little old-fashioned in the importance of identifying and the end. One simple way of defining
our approach and appreciate the following trends. Plenty of investors a recovery is a share that was going
human touch. But a little automation get seduced by the call of the coun- down and has now started going up.
can still help filter the opportunities ter-trend and attempt to call a bot- Remember – we do not want to be
in the thousands of shares listed on tom in a falling market – the fabled buying into a share that is still falling
the world's exchanges – and so that catch a falling knife approach. Oc- – it has to at least have shown some
is the topic for this month's charting casionally, of course, this can work degree of sustainable strength.
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CHART NAVIGATOR
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CHART NAVIGATOR
The time periods used can be subjec-
tive – but as we are focussing on invest-
ing rather than trading, I tend to define
significant weakness as a share price
that has slid for a year. And the start
of a recovery? If the price is currently
higher than it was three months ago,
we have the start of a more robotic ap-
proach to coming up with an investing
shortlist that saves us the leg work of
having to flip through many charts.
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CHART NAVIGATOR
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CHART NAVIGATOR
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INVESTING IN THE AGE
OF LONGEVITY
1 November 2018, 9.30am
Wellcome Collection, London
Forensic forex
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FORENSIC FOREX
“THE ACTIVITY IN
RECENT MONTHS HAS
LEFT EUR/USD LOOKING A
LITTLE OVERSOLD TO SAY
THE LEAST.”
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FORENSIC FOREX
trade wars and tariffs. But it was what
was being suggested regarding interest
rates that knocked the euro – and un-
derlined its biggest fall for two years.
The withdrawal of the QE programme
suggests a positive outlook for the
economy – but it was also signalled that
interest rates will not rise until the mid-
dle of next year. This is a clear message
of caution from the central bank.
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FORENSIC FOREX
But maybe, in the short-term at least,
this move is overdone. EUR/USD
pulled back to its lows from Novem-
ber 2017, an area that proved to be
the launching pad for a 1,000 point
move to the February highs. Admit-
tedly it has briefly poked through
these lows as shown by the arrows
on the chart, but so far, the 1.15 area
has brought the buyers back in. It
would not be too much of a stretch to
see some sort of euro recovery from
here, at least to back above the 1.20
zone. No market moves in a straight
line forever and the activity in recent
months has left EUR/USD looking a
little oversold to say the least. So, the
short-term expectation for some sort
of bounce back does not look overly
pessimistic.
About David
David Jones qualified as a technical analyst in 1995 and started his City career as a currency analyst. He then went
on to work for trading companies CMC Markets and IG Group as Chief Market Strategist. Since leaving the industry
in 2013 he has been a presenter on BBC Radio 5 Live's Wake up to Money programme and the Chartist for Shares
magazine. He is an active trader and private investor.
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BY RICHARD GILL, CFA
book review
The Geometry
of Wealth
How to shape a life of money and meaning
By Brian Portnoy
The modest library I have put to- wealth has the ability to underwrite a an investment company with $80 bil-
gether over the years probably con- meaningful and ultimately happy life. lion under management. Portnoy is
tains over 300 books on the topic of The core concept is that financial deci- also a regular financial blogger and has
finance. From the dry as a bone The sions and having a joyful life are com- previously authored The Investor's Par-
History of Interest Rates, to the exple- plementary, not separate things, and adox: The Power of Simplicity in a World
tive laden, fictional alien jaunt The that just aiming to become rich in itself of Overwhelming Choice, a road map for
Bankers Who Sold the World, I have a can be ultimately unsatisfying. navigating the complex landscape of
cornucopia of titles to choose from. countless investment strategies.
The vast majority of my finance re-
lated books, however, are mainly
“LIKE BEING ON Shape Your Future
aimed at making the reader a better
investor. Whether by providing a re- A NEVER-ENDING For many, money can be a difficult, and
view of financial theory, the latest TREADMILL, THE even taboo, subject, not talked about
investment techniques or analysis QUEST TO BE RICH over the dinner table with friends or
of an investment philosophy, most even family. It can cause a range of
authors are hoping their books will
DOESN’T HAVE AN emotions from excitement to despair
help make readers more wealthy or END.” and, at times, be complicated to un-
'rich'. derstand. As a result, we tend to focus
on only the practical matters of finance
For these authors, the concept of Portnoy is a clever fellow, having a and ignore the bigger, more philo-
wealth, or accumulating as many as- PhD and the Chartered Financial Ana- sophical questions about money, such
sets as you can, is not elaborated lyst qualification, and is billed as being as, "can it buy you happiness?" In The
upon, or just assumed to be the ulti- an expert at simplifying the complex Geometry of Wealth, the author tack-
mate achievement in itself. So it was world of money. He has 25 years' ex- les these issues and attempts to make
refreshing to come cross The Geometry perience in money management and sense of the relationship between
of Wealth, a unique effort from author as an academic, with his current day money and meaning, also offering a
Brian Portnoy which focuses on what job being Director of Investment Edu- plan for anyone who wants to grow –
being wealthy truly means and how cation at Virtus Investment Partners, and stay – wealthy.
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BOOK REVIEW
We then move on to the triangle,
which represents the priorities we
must set to help make better finan-
cial decisions. While we might already
know what will make us happy, we
now need to plan how to build up the
resources to get us there. The triangle
represents three steps of basic finan-
cial planning, with Portnoy suggesting
we should first protect our wealth by
considering risk, match our resources
to meet our goals and then at the
top of the triangle build on what we
have achieved and reach for more. A
second triangle then illustrates what
drives good investment decisions,
with individual behaviour, portfolio
construction and parts of the portfo-
lio (individual assets) being the three
components.
To begin with, the distinction between illustrates the ever-changing, flexible Finally, the square looks at the tactics
being 'rich' and being 'wealthy' is made. and never-ending nature of purpose, of how to strive for decent outcomes,
Being rich focusses on having 'more'. with us constantly adapting to our cir- covering the four quantitative ele-
But like being on a never-ending cumstances through life and redefin- ments of investment – returns, vol-
treadmill, the quest to be rich doesn't ing what it is that gives us purpose and atility, correlation and liquidity. The
have an end. Wealth, however, is de- makes us live a meaningful life. Once square's focus on these important
scribed by Portnoy as being "funded we know our purpose and what makes factors will help to set expectations of
contentment". In other words, having us happy, then money enters the equa- how our capital might grow and drive
the financial resources to underwrite tion. After all, we need to know if we us towards funded contentment.
a meaningful life. This is achievable can afford to purchase the things that
for many, the author argues, even for give us contentment. Be a Square
those people who think that wealth is
well out of their reach, as long as they There then follows a very interesting Overall, this is a truly enlightening,
have the right plan and the right mind- discussion on whether money can buy thought-provoking and refreshing
set. us happiness. The answer to this age book which teaches readers how to
old question is complicated and often think about wealth in terms of what is
Following the brief introduction and conflicting. "Money can't buy me love", important to them. Portnoy is a master
background discussion of the role so sang The Beatles. That may be true, of his craft, blending together finance,
of money, the core text of the book but on the other hand American novel- economics, philosophy, psychology
comes in three parts, each concentrat- ist Gertrude Stein once said, "whoever and even neuroscience, in an entertain-
ing on a particular shape – a circle, tri- said money can't buy happiness didn't ing and readable manner. One of the
angle and square. These represent the know where to shop". The basic conclu- best books I have read so far this year,
path the reader must take to achieve sion seems to be that while money can The Geometry of Wealth is a great com-
funded contentment. contribute towards increased happi- pliment to the library of any investor.
ness, happiness can also be achieved
The start of the journey begins with the independently of money. After all, the About Richard
circle, which represents how we figure 'rich' can be miserable just as easily as
out our purpose in life. The circle itself the 'poor' can be content. Richard Gill is an investment
analyst with over a decade's
experience of analysing small/
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Get 25% off RRP The Geometry of Wealth. Richard qualified with the Char-
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designation in 2012 and was
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from 2013 to 2017.
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ww BY TIM PRICE
Why do so many financial Chart 1: annual 20 year returns for the UK stock market
advisers favour stocks?
That phrase you can hear marching
predictably and relentlessly towards
you is 'stocks for the long run'. We
are all taught, seemingly from the
cradle, that equities outperform all
other asset classes over the long
run. Well, up to a point, Lord Copper.
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THE FINAL WORD
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THE FINAL WORD
was just one period during which the The two figures ringed (top left and bot-
stock market generated strong returns tom right) represent 1919 and 1929.
(between 8% and 10% per annum, on
average). That period was 1980-1999. In 1919, the US market was almost lit-
Otherwise, the average return from erally bombed out, having been heavily
stocks over the last three centuries, af- impacted by the privations, sacrifices
ter inflation, was something either side and capital redeployments associated
of zero. To answer the question: Why with the First World War. As a result, it
do so many financial advisers favour was cheap, trading on a p/e of roughly
stocks? I offer: because almost all of 6 times. By dint of buying it cheaply,
them lived through that 1980-1999 pe- investors in 1919 did well over the sub-
riod during which the market delivered sequent decade, enjoying returns of
strong absolute returns. But in the con- nearly 20 percent per annum.
text of three centuries' worth of data,
that period was a one-off. Perhaps In (you guessed it) 1929, on the other
'stocks for the long run' is a big over- hand, the US market was objectively
simplification, and one heavily skewed expensive by any historical measure,
by recency bias? trading on a p/e of nearly 30 times. By of roughly 14 times – and yet investors
dint of buying it expensively, investors who bought the market in 1911 still
Argument #2 for the prosecution. The in 1929 didn't do anywhere near so suffered subsequent annual returns
second chart shows 100 years' worth well. They earned roughly nothing, per of roughly minus 4 percent for the next
of data drawn, this time, from the US annum, for a decade. decade.
stock market (lest you accuse me of
home country bias). As I point out in my book, Investing The importance of
Through the Looking Glass (from which valuations
Each two-digit data point represents these two examples are drawn), 1929
a year, between 1890 and 1990. The wasn't even the worst period to be a Turns out 'stocks for the long run'
x-axis shows the price/earnings ratio buyer of US stocks. Take a look at the needs some refinement to constitute
for the S&P 500 stock index for each years 1909, 1910, 1911 and 1912. In practical advice. I suggest: 'stocks for
year in question, and the y-axis shows 1911, for example, the market wasn't the long run, acknowledging that start-
subsequent ten-year returns. particularly expensive, trading on a p/e ing valuations are important, and that
investors can still be unlucky'. After
all, as the authors Marsh, Daunton
“IF YOU HAVE MONEY MANAGED BY A GLOBAL and Dimson point out in their highly
EQUITY FUND MANAGER, THE CHANCES ARE THAT respected statistical analysis of stock
market returns over the very long run,
YOU NOW HAVE A SHED-LOAD OF US MARKET
Triumph of the Optimists, a) Anglo-Saxon
EXPOSURE.” (that is to say, US and UK) stock mar-
kets have tended to outperform most
Chart 2: Shiller's scattergram other stock markets, at least over the
last century, and b) there are examples
of other countries' stock markets that
closed during a crisis, never to re-open.
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THE FINAL WORD
Chart 3: Shiller p/e for the US stock market, 1880 - 2018
Source: http://www.multpl.com/shiller-pe
MSCI World Equity Index. To put it an- accumulate seven million dollars?" And except finance are those stories possible.
other way, if you have money managed her secret was, she really had no secret There's no other industry in which some-
by a global equity fund manager, the at all. She saved what little she could, one with no education, no background
chances are that you now have a shed- she put it in the stock market, she let it and no experience can vastly outperform
load of US market exposure whether compound for 80 years and that was it, someone with the best background, the
your manager even likes prospects for end of story. best education, the best experience.
the US market or not. Such are the un-
intended consequences of index-track- The second investor I want to talk about It's unthinkable that Grace Grahner
ing – a problem exacerbated by the today is a guy named Richard. Save his could have performed heart surgery
rise of (almost exclusively passive) ex- last name, because you're not supposed better than a Harvard-educated cardi-
change-traded funds. to criticize people in public. Although I ologist, or built a skyscraper better than
do a lot. Richard had almost the exact the best construction company. It's com-
A tale of two investors opposite background of Grace Grahner. pletely unthinkable that that could ever
Born into a wealthy family, went to the happen, but it happens in investing. And
This is not to say that 'stocks for the University of Chicago, got his MBA at Har- what I think it shows is that investing is
long run' no longer has validity, subject vard Business School, went to work on not necessarily about what you know, it's
to the caveats or refinements offered Wall Street, worked his way up at some about how you behave.
above. I particularly liked, for example, of the biggest investment firms, became
Morgan Housel's presentation 'What the vice chairman of one of the largest The full presentation is well worth
other industries teach us about invest- investment banks and without exaggerat- watching – it's one of the best I've ever
ing', which you can watch here, and ing was one of the most powerful people seen on the business of investing. But
which begins with a terrific anecdote in global finance. on the topic purely of equity investing,
about the merits of patient, long term we all need reminding about that com-
investing: The day after Grace Grahner died, Rich- mitment to the long run as displayed
ard filed for personal bankruptcy. He told by Grace Grahner. As the Canadian
Grace Grahner… was born in 1909, just the bankruptcy judge that the financial value investor Peter Cundill once re-
right outside of Chicago nearby. And she crisis completely wiped him out, he had marked: The most important attribute
had kind of a hard life. She was orphaned no more assets, no more income and he for success in value investing is patience,
as a child, she began her career in the was fighting to save foreclosure on his patience, and more patience. THE MAJOR-
bottom of the Great Depression. Finally house. And what's interesting about these ITY OF INVESTORS DO NOT POSSESS THIS
found a career as a secretary, where she stories, I think, is that in no other industry CHARACTERISTIC.
worked her entire life. Never married,
never had kids, never learned how to
drive a car. Lived almost her entire life in About Tim
a one room house, not far from here.
Tim Price is manager of the VT Price Value
By all accounts, she was a lovely lady, Portfolio (www.pricevaluepartners.com) and
but lived kind of a sad life. And Grace author of 'Investing Through the Looking
Grahner died in 2010, she was 100 years Glass: a rational guide to irrational financial
old. And everyone who knew her was markets'.
completely shocked to learn, when she
died, that she had seven million dol-
lars to her name, that she left all of it to
charity, and that began kind of a search
among the people who knew her, that
said, "How does this humble secretary
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