Healthcare and IT-focused Edinburgh Worldwide beats benchmark

Healthcare and IT-focused Edinburgh Worldwide beats benchmark – Global smaller companies-focused Edinburgh Worldwide (EWI)’s results period to 31 October 2019 saw NAV total returns come in at +7.4% (the shares returned +6.7%), ahead of the S&P global small cap index benchmark’s +7.2% total return.

A number of the company’s holdings contributed to the positive performance, notably:

• Novocure, a US manufacturer of medical devices for cancer treatment;
• Seattle Genetics, a US biotechnology developer of monoclonal antibodies; and
• Galapagos, a Belgian clinical stage biotechnology company.

As at the year end, the company held seven unlisted investments accounting for 5.5% of total assets (2018 – 3.2% of total assets in five holdings).

Portfolio update from the manager

“We continue to find exciting immature, innovative companies in which to invest and remain enthusiastic about the prospects of the current holdings in aggregate. In the interim report we discussed, amongst others, the purchases of Appian, Zuora, Axon Enterprises, Kaleido Biosciences, SpaceX and Upwork. The two new purchases in the second half of the Company’s year were Zai Lab and PSIQuantum. Zai Lab is a Shanghai-based emerging biopharmaceutical company developing drugs in oncology, autoimmune and infectious diseases. It is focused on bringing best-in-class assets to China via partnerships with leading global pharmaceutical companies and in therapeutic classes prioritised by the Chinese FDA. One of Zai Lab’s partners, Novocure (an existing holding in the portfolio), has developed a patented, FDA approved, novel therapeutic which uses electrical fields to stop cancer cell division. Zai Lab has the exclusive license for this technology in China and the potential upside from this one division alone could be transformational for it.

PSIQuantum is an unlisted company working to develop commercial quantum computing. Current industry approaches employ exotic materials and error-prone electrons to achieve basic quantum functionality. In contrast, PSIQuantum’s components are made from silicon, allowing them to use traditional semiconductor manufacturing techniques and use photons which are much more stable. Their approach shows signs of being a uniquely scalable solution and one which could realise the field’s ultimate promise of solving the most complex, pressing and lucrative problems in the world today. Although in its infancy, we are impressed by the quality of the people, partnerships and processes that the Company has assembled to meet this challenge in the years ahead.

We added to the holding in US-based Codexis, a manufacturer of custom enzymes for the pharmaceutical industry. We see increasing scope for this business to broaden from supplying enzymes used in drug production towards one in which the enzymes themselves will be the active therapeutic. This would move the company higher up the value chain and could radically alter the financial characteristics of the business. 

In the second half of the financial year we added to the holding in Oxford Nanopore as some existing shares became available. We have been impressed with how nanopore sequencing is gaining traction in the scientific research community driven by technological differentiation and low-cost accessibility. Following strong share price performance, we further reduced the holding in the home-furnishing e-commerce company Wayfair and we exited the positions in Nanoco, Thin Film Electronics, Basware and Xaar.”

In his investment outlook, chairman, Henry CT Strutt, notes: “For some investors, uncertainty regarding Brexit has resulted in risk aversion and a desire to withdraw exposure to equities. The reality for this portfolio is that should sterling weaken in aggregate against other currencies, then investor returns are likely to increase as the majority of assets within the portfolio are non-sterling denominated. Therefore, the converse holds true. Rather than focusing on macro-economic developments, the managers continue to direct their efforts to picking the best entrepreneurial, immature growth companies that create and exploit investment opportunities, and which exhibit excellent long-term growth prospects and the potential for positive long term returns wherever they are listed. The managers and the Board remain enthused by the prospects for the holdings within the portfolio and the many exciting company specific developments being announced. Whilst markets exhibit volatility, the investment trust structure permits the managers and discerning long-term investors to take positions for the long term when the tide of money or sentiment depresses valuations.” 

Sectoral allocation: Healthcare and IT focused

EWI: Healthcare and IT-focused Edinburgh Worldwide beats benchmark