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Questor: this trust just sold a holding for £600m – and its entire market value is only £1.4bn

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On Wednesday we chose a healthcare company as our stock tip of the year, on the basis not only of our expectations of its own recovery but because of investors’ recent aversion to the sector as a whole. We will double down on that belief today and pick our investment trust of the year from the same arena.

Our choice, Syncona, is an unusual beast: it invests in young life sciences companies with a view to holding them through the various stages of drug discovery, clinical trials, commercialisation and perhaps an eventual stock market listing.

This is not the first time we have tipped the trust; we first did so in 2018 and have reiterated the advice since. Some readers will not thank us as the shares have lost 22.7pc since that first tip. Why then are we backing the fund again?

Simply because we think the market fails to see its potential or perhaps does not have the patience to wait for that potential to become apparent in actual profits. As we said on Wednesday, generating returns from the scientific breakthroughs at which the healthcare sector excels takes time, while many investors have made fortunes over the past couple of years from spotting the immediate bounty on offer from Covid winners such as Microsoft.

Syncona’s portfolio currently consists of 12 companies and it aims to increase that number to between 15 and 20. Several can offer concrete evidence of progress: collectively 12 of their treatments are undergoing clinical trials and three have already floated on the stock market.

Of four companies no longer in the portfolio, two, Blue Earth and Nightstar, were sold for impressive gains of 9.9 and 4.5 times the amount invested respectively, while the other two proved unviable and were wound up. A 50pc success rate is good when you are seeking to build businesses from nothing in a sector that teems with scientific, regulatory and commercial risks.

But it is the fund’s most recent deal that cements our belief that its managers are equal to the challenge and can be expected to produce a regular stream of lucrative winners.

Just before Christmas Syncona announced that it had agreed to sell its 48.5pc stake in one of its holdings, Gyroscope Therapeutics, which makes gene therapies for blindness, for up to £589m. The fund had co-founded Gyroscope in 2016 and funded it since but the really striking thing is how that £589m figure, admittedly the maximum proceeds, compares with the value that the market currently ascribes to the entire trust: just £1.4bn.

Investors seem to be expressing scepticism that any other holdings, current or future, will generate returns along the lines of those achieved by Gyroscope. In view of that 50pc success rate on investments already exited, such a view seems very pessimistic to this column.

Or perhaps the market was spooked by what seemed, before this deal emerged, to be a lofty premium on the fund of 29pc, or a sky-high 69pc implied on the unquoted part of the portfolio. Gyroscope’s sale brings the overall premium down to 7.3pc and that on the unquoted part to 26pc, according to calculations carried out by JP Morgan Cazenove, the broker, on the day the deal was announced.

Questor’s view is simple: the sales of Gyroscope, Blue Earth and Nightstar, along with the flotations of other holdings such as Autolus, show that this fund knows its business. We therefore expect similar success stories in future and the generation of returns that will comfortably exceed its current market value.

The only proviso is that it won’t happen overnight and so readers will have to show more patience than perhaps with other Questor tips. As we have said before, it’s one to buy and tuck away.

Questor says: buy

Ticker: SYNC

Share price at close: 204p

Update: Strategic Equity Capital

This smaller companies fund, tipped by Questor in June last year, may not be around for much longer: two days before Christmas it was on the receiving end of a takeover proposal from Odyssean investment trust. If no deal is done, SEC is in good hands under its current manager, Ken Wotton. It’s too early to say whether the takeover will happen; meanwhile readers should hold on to SEC.

Questor says: hold

Ticker: SEC

Share price at close: 316p

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

Read Questor’s rules of investment before you follow our tips.

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