Fund manager Ailsa Craig awaits rate cuts to spark a biotech rebound (2024)

Deciding on where to put your money at the moment isn't easy.

The stock market is erratic, property prices have fallen in many areasand inflation has decimated people's savings for more than two years - albeit finally savers are enjoying real returns.

You might think those in the investment management industry have a better understanding of how to thrive under current circ*mstances.

Each month, This is Money is putting a senior fund or investment manager to task with a number of questions that'll require them to go out on a limb.

We want to know where they'd invest for the next 12 months or even next 10 years and what they would avoid.

We will quiz our willing professional investors on the future of inflation, interest rates and the property market.

Among other things, we will ask them for their views on gold, Tesla and bitcoin.

This week, we spoke toAilsa Craig, portfolio manager at International Biotechnology Trust (IBT).

The International Biotechnology Trust invests in around 100 quoted and unquoted companies across the biotech and other life sciences sectors.

The trust currently trades at a discount of more than 11 per cent and offers a dividend of 4 per cent of closing net asset value, paid biannually.

1. If you could invest in only one company for the next 10 years, what would it be?

Ailsa Craig replies:Outside of my job as a fund manager, I never invest in single companies - I only invest in funds.

Being a fund manager, I recognise the risks of investing in single companies and this is especially true in biotech where a diversified approach helps to reduce the volatility inherent in the sector.

Given biotech’s volatile nature, we trade actively, so we would not typically hold a stock for 10 years at a time.

2. Okay, so what about for the next 12 months?

Within the investment trust, I would say Cytokinetics. This is a company with a drug that has proven efficacy for a type of heart failure.

The next step for the company will be gaining approval for its drug from the regulator.

I don’t think it’ll remain an independent company for long as it seems likely that a larger pharmaceutical company will buy it to expand its own product pipeline.

Even if it is not bought, it remains attractive as it has a de-risked asset with great data, addressing a significant unmet medical need.

3. Why has the Biotech sector struggled of late?

Biotech goes in and out of favour for numerous reasons. There was a big bubble in valuations during the pandemic, and the bursting of that bubble alongside rising interest rates has been a double whammy for the sector.

This is despite the strong fundamentals of the underlying industry, with a dramatically aging population driving growing demand for drugs and scientific innovation continuing to accelerate.

4. So, is the future bright for biotech?

The depressed valuations in biotech right now are creating some exciting opportunities.

Consequently, we are seeing a wave of acquisitions from big pharmaceutical companies, which recognise they can pick up high quality, innovative companies at bargain prices.

We are particularly excited about the advancements in rare diseases and drugs to treat central nervous system ailments such as mental health conditions.

If interest rates begin to fall, this could also be a tailwind for biotech, as the sector has historically been highly reliant on financing to develop new drugs.

3. Which other sector should investors be excited about?

I think the UK investment trust sector in general is interesting at the moment.

As well as equity and specialist equity trusts, the sector also offers a means for investors to get exposure to alternative assets, or venture assets that are otherwise hard to access.

Investment trusts are currently trading at wider discounts than usual and there are several potential catalysts that could change this, including the FCA’s review into how the costs of owning investment trusts are disclosed.

The current rules make them look more expensive than they actually are, so if this is changed, we may see increased investment in the sector.

6. What sector would you be avoiding and why?

US tech. The sector has had a fantastic run and it could be hard to repeat that this year.

7. Which country offers the best value for investors?

The UK stock market has gone sideways for over a decade. I hope that current valuations are attractive and we will see a recovery from here, rather than this being symptomatic of a longer-term issue with the UK.

8. Should investors target growth or value stocks?

It really depends on what their risk appetite is and how long they have until retirement.

Saying that, smaller and mid-sized company valuations do generally look attractive at the moment, as larger companies have been taking the limelight.

9. Tesla – will it ultimately be boom or bust?

Like biotech, these types of companies tend to experience hype from exuberant investor support.

I like companies that disrupt the status quo and bring solutions for the future. Tesla is the pioneer in electric vehicles and has taken all competitors by surprise.

We are in the early innings, and it looks like EVs will eventually take over.

However, in specialist sectors, I would tend to follow the lead of specialist investors who are better placed to take a view on valuation.

10. Is the property market as 'safe as houses' or due a crash?

Dull answer but it depends on location, location, location. I’m not a real estate expert but personally I’m overall negative on the housing market.

However, last time we saw a pullback in London, overseas investors swooped in. if I could afford to buy a property for my children now, I probably would.

11. Gold - should this form a part of everyone’s portfolio and why?

Yes, and it’s part of mine. I like the diversification. It is a defensive holding in times of volatility and disruption in the market, and a hedge against inflation.

12. Will interest rates return to rock bottom again?

Our economists expect interest rates to be lowered later this year as inflation heads back towards target.

However, because inflation pressures are likely to persist, we don’t expect a return to 'rock bottom' or near-zero interest rates.

This will be tough for borrowers but give savers something to cheer for.

13. Are obesity drugs the next big thing?

Obesity drugs are currently in the spotlight. The drugs are incredibly effective and this means many patients want them, even to the extent that they are motivated to pay out of their own pockets for them.

The industry will continue to innovate in this area, bringing potentially better drugs that are cheaper and easier to use.

This could bring down the overall costs and thereby, associated revenues, but no one can deny that obesity drugs will remain a focus for patients and companies alike.

14. How will the US presidential election impact the biotech sector?

Drug pricing is often used as a political football in the run up to the US presidential elections which are held every four years.

However, this time we envisage the spotlight being on the general economy and geopolitical concerns.

This is due to the fact the Democrats’ Inflation Reduction Act allows the US healthcare payer, Medicare, to negotiate the price of certain popular drugs with pharmaceutical companies which, in my view, takes the issue off the political table for the time being.

15. Has the pandemic moved the biotech sector forwards or backwards?

The biotech sector is constantly moving forwards and adapting to what is thrown at it.

The pandemic was a great example where innovation and motivation came together and our industry successfully innovated both vaccines and treatments against Covid.

Since then, the sector has continued to address diseases with an unmet medical need and in 2023 we saw 55 new drug approvals, the highest number since 2018.

16. You inherit £100k tomorrow. What would you do with the money?

I would probably use it to pay for a deposit on a London property. With prices where they are, I fear my kids will have to live hundreds of miles away and I’ll never see them.