Edinburgh Worldwide Investment Trust (EWI) has announced its annual results for the year ended 31 October 2018. During the year, EWI provided Nav and share price total returns of 14.9% and 19.0% respectively. EWI says that its comparative index, the S&P Global Small Cap Index, increased by 0.1% in sterling total return terms. EWI says that a number its holdings contributed to the positive performance, notably: Ocado, an online grocery company, Wayfair, a US online furniture and homeware retailer, and STAAR Surgical, a US developer and manufacturer of visual implants. It also says that approval is to be sought to increase the permissible limit for private investments and to undertake a share split its ordinary shares on a five for one basis.
Private investments proposals
As at the 31 October 2018, EWI held five unlisted investments accounting for 3.2% of its total assets (2017 – 2.1% of total assets in three holdings). At EWI’s AGM, the Board is asking shareholders to an increase in EWI’s permissible limit for unlisted investments, from 5% of total assets (at the time of initial investment) to 15%.
EWI reports that there were three new unlisted purchases during the year: Reaction Engines, a UK company that designs and manufactures very advanced heat exchangers; Akili Interactive Labs, a US company utilising technology for healthcare; and KSQ Therapeutics, a US preclinical-stage biotechnology company focusing on oncology and immuno-oncology product development. Unity Biotechnology, which was bought in October 2016, listed on Nasdaq in May this year.
EWI’s managers say that they remain alert to further special and high potential opportunities not widely accessible through public markets. The managers still have 1.8 percentage points of headroom to invest in unlisted investments but say that, at points over 2018, they have had concerns that the 5% limit could curtail investments in potentially very exciting opportunities. The managers say that, considering the increasing quantum of interesting unlisted investment opportunities emerging that fit their criteria for investment, the Board is seeking shareholder approval to increase the permissible limit in unlisted investments to 15% of total assets at the time of initial investment. The managers say that they look to invest in immature but innovative businesses that are best positioned and able to prosper in a rapidly technologically evolving world and that will typically, although not necessarily, have a market valuation of less than US$5billion at time of initial investment.
Fee changes
With effect from 1 January 2019 the annual management fee payable to the Company’s Investment Managers and Secretaries, Baillie Gifford & Co Limited, will be as follows: 0.75% on the first GBP50m of net assets, 0.65% on the next GBP200m of net assets and 0.55% on the remaining net assets. The fees are calculated on a quarterly basis.
Share split proposals
EWI’s board says that it has observed a marked shift in the composition of the Company’s share register and that the majority of investors now represent, or are, individuals investing on an advised or direct basis, particularly through investment platforms. One of the disadvantages of a high share price is that regular savers, who often make small monthly share purchases, may find that a considerable proportion of their monthly payment remains uninvested (note: over the 12 months to 31 October 2018, the Company’s share price has risen from 690.50p to 822.00p and at points to over 1000.00p). The board says that by reducing the share price, through increasing the number of shares in issue by way of a share split, and reducing the amount of uninvested cash from regular savers, should help improve trading liquidity to the benefit of all. Consequently, the Board is seeking shareholder approval to subdivide each existing ordinary share of 5p nominal value into five ordinary shares (of 1p nominal value). If approved, the number of shares held by each investor will increase five fold and the share price will reduce to one fifth of its prior amount, resulting in no change to the aggregate value of the holding.
Manager’s commentary on performance
“The most significant contribution to performance over the year was Ocado, the online grocery company, where the announcement of several licensing deals with large incumbents around the world endorsed our view that it has the most compelling solution for selling online grocery at scale. The most notable of these licensing deals is with Kroger, the second largest grocer in the US. This could see up to 20 Ocado-powered warehouses built in the US over the coming years. It is a transformational event for Ocado and a clear endorsement of how forward-thinking supermarkets are approaching the changes in consumer habits. Another of our e-commerce companies, Wayfair, also produced strong returns over the 12 months. Wayfair’s expertise in merchandising furniture and home furnishings presents challenges that are different to the grocery offering of Ocado, yet both companies are pioneers of a digital offering into their respective end markets. Whilst pleased with their progress thus far, what strikes us most is just how early these vast end markets are in their transition to online, and how their offerings are rapidly evolving to be ultimately better for consumers, not merely an alternative. STAAR Surgical and Teladoc, both relatively recent purchases in the healthcare area, yielded very strong returns. STAAR Surgical, a developer of vision correcting implantable lenses, benefited from strong growth of its offering in Asia plus the removal of regulatory hurdles. This now opens the vast potential within the US market. We see a great opportunity for the business both to take share from laser-based vision correction and to expand the market for vision correction to those with more pronounced short-sightedness. Teladoc is emerging as the dominant company in the nascent telemedicine industry. The use of digital technologies to guide both patients and doctors outside of conventional GP and hospital settings is an area that offers huge cost and efficiency gains for consumers, employers and payers. We think that, in broadening its offering from simple GP consultations towards chronic conditions, mental health and expert consultations, Teladoc is building a compellingly deep and sophisticated offering that could evolve to become the initial point of contact through which an individual will engage with the health system.
Negative contributors to performance over the past year included several long-standing holdings. In many cases, this follows the stocks having been exceptionally strong performers in the previous year. We would highlight the drug development company Alnylam Pharmaceuticals, the financial market place LendingTree and fibre-laser manufacturer IPG Photonics. In all cases the weakness has been prompted by near-term, largely cyclical concerns which we believe ignore the longer-term potential of these businesses. With regard to Alnylam and LendingTree, we used the weakness to add to the positions.”
Manager’s commentary on the portfolio
“We acquired a number of new holdings over the year. The purchases of BlackLine, Jianpu Technology, resTORbio and Reaction Engines were discussed in the Interim Report. New purchases in the second half of the year included the following:
Evolent Health
Evolent Healthis a US-based company which aims to change the way healthcare in the US is delivered. Hospitals and physician groups in the US are facing structural challenges driven by the growing pressure on the budgets for federal programmes such as Medicare and Medicaid. Other factors include an ongoing reduction in reimbursement rates and a push towards payment based on patients’ outcomes rather than the number of procedures performed by the hospital. Evolent Health consults with hospitals and physician groups and sells them software to help them move away from a fee-for-service reimbursement model. The transition to value-based healthcare is still in its early days and the opportunity for Evolent Health ought to be very large. With a growing number of hospitals using its software, the company is developing a valuable data advantage and helping hospitals improve their productivity further as well as enabling them to take on insurance-style risk.
CyberArk Software
CyberArk Software is an Israeli cybersecurity company focused on protection for privileged accounts (powerful internal accounts that are managed by IT administrators or senior employees). These accounts are critical because they are the gate to sensitive information within an organisation, such as customers’ credit cards, patients’ medical records or employees’ personal details. In layman’s terms, what CyberArk does is to put the passwords associated with those accounts into a safe, monitor them and block the access if it suspects malicious behaviour. This is referred to as privileged account management (PAM), an area where CyberArk is recognised as the pioneer and market leader. As approximately 80% of security breaches involve compromised privileged accounts, we see significant scope for the company to grow industry penetration from its current low base.
Rubius Therapeutics
Rubius Therapeutics is a biotechnology company that is seeking to use edited red blood cells to deliver therapeutic proteins. This is achieved by harvesting progenitor blood cells which are edited using techniques similar to gene therapy. Red blood cells have a number of advantages as delivery mechanisms; they have a long (but not indefinite) lifespan, are not attacked by the immune system, can be easily delivered through transfusion and offer the ability to create an ‘off the shelf’ product using Type ‘O’ cells. Rubius will shortly be entering clinical trials but has compelling pre-clinical data showing the approach could work in a wide range of disease settings ranging from genetic enzyme deficiency to autoimmunity.
Yext
Yext is a New York based software company. It helps businesses manage and synchronise digital information (from basics like opening hours to more frequently updated features like menus, in-store sale campaigns and special events) across a large and growing network of services such as Facebook, Siri, Google Maps, WeChat and others. Yext began through building a rational, up-to-date database focused on local content for small businesses. The value proposition of this was simple; small businesses could be in charge of their own information and therefore they could ensure consistency of that information across multiple different search or aggregation sites. Ongoing changes in how people search (i.e. more Alexa/Siri interfaces, more natural query and some dominant content aggregators) has pushed the topic of corporate ‘knowledge management’ much higher up the agenda. No longer is this simply about helping small businesses. Rather, the real growth is in helping bigger companies present an up-to-date view of their business, both internally and externally. The changing emphasis of the Yext offering from ‘local’ to ‘fundamental’ massively increases the addressable market and ultimately broadens the relevance of what it offers.
Unlisted investments
We increased the portfolio’s unlisted exposure through initiating holdings in two private US companies, Akili Interactive Labs and KSQ Therapeutics. Akili Interactive Labs designs video games incorporating embedded therapeutic algorithms to both treat and monitor a range of neurological conditions. It is a business we have followed for several years and owned indirectly on account of it being one of the larger healthcare businesses within PureTech Health, the London-listed healthcare incubator, which is an existing holding for Edinburgh Worldwide. Akili recently demonstrated the clinical significance of its iPad-based therapeutic game, EVO, in a pivotal trial for ADHD, an achievement which we think makes it a real stand out in the emerging area of digital medicine. With growing evidence that game-based stimuli can drive long-term cognitive benefit, we are intrigued by the possibility of Akili taking its technology into many additional areas of neurological therapy. KSQ Therapeutics has found a way to identify and validate novel drug targets at scale using a rational platform-based approach. Initially their efforts are focused on cancer, but over the longer term the powerful platform could be pointed towards several other diseases. The company uses CRISPR technology to selectively cut (and hence destroy) specific genes within cells. Once the library of knocked-out cells has been produced, the individual clones can be extensively studied in a variety of in vitro and in vivo experiments with the goal of finding cells in which the destruction of a particular gene has yielded a profound impact on a disease. KSQ already has a range of targets which seem to show enhanced migration to, and significant reductions in, tumour volume relative to existing leading-edge immuno-oncology drugs.
The investments in Akili and KSQ are indicative of the interesting dynamic opportunities we are seeing in the unlisted area. Their addition to the portfolio results in there now being five unlisted holdings, 3.2% of total assets at the year end, each representing an exciting investment opportunity that is innovating in areas that are difficult to access through listed businesses alone. As detailed in the Chairman’s Statement, we see increasing opportunities in the unlisted area and we are building up resource accordingly.”