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BB Healthcare Trust - Positioned to Maintain Returns

Writen by Riccardo Lowi

KEY INVESTOR MESSAGES 

Healthcare remains a highly attractive sector, supported by a tidal wave of innovation in both therapeutics and the provision of healthcare services
BB Healthcare team is now building up on 2017 outperformance (+4.9%, despite currency headwinds) and asset growth
Expect 2018 stocks' performance to be driven more by fundamentals (and M&A), less by political issues (tax reforms, Obamacare repeal)
BB Healthcare portfolio best positioned to capture the strongest emerging themes in healthcare, across bio-pharma, services, wellbeing
Reiterated commitment to returning capital via yearly dividends of 3.5% of NAV

KEY 2018 HEALTHCARE THEMES

From an industry perspective, healthcare fundamentals remain strong.
 
Demographic trends and the need to contain healthcare expenditures favor companies that can bring true innovation to the market, in terms of therapeutic solutions and new, more cost-efficient ways to deliver healthcare. 
 
The most advanced computational techniques for big data analytics and machine learning are being increasingly applied to several areas of healthcare including drug discovery, diagnostics, and wearable devices for real-world data collection.
 
We are seeing an unprecedented flow of capital to fund innovation in the venture capital side of the healthcare industry. This will over the years translate in innovative companies being floated in the major stock exchanges, creating a flow of new opportunities for BB Healthcare.
 
Last year the sector's performance was heavily influenced by political themes including the Trump's administration dealing with Obamacare and the US tax reform bill that was finally passed in December. The expectation that Amazon was about to enter the drugs distribution business and the later announcement of a yet-to-be-defined healthcare partnerships between Buffet's Berkshire Hathaway, Bezos' Amazon and Dimon's JP Morgan sent shockwaves through the sector, and in particular negatively impacted healthcare insurers and pharmacy benefit managers' stocks. That until it become clear that it wasn't Amazon's intention to enter the drugs wholesale market, and that the partnership between the three big companies was meant to optimize the management of the healthcare benefits for their own employees, rather than creating a new competitor in the health insurance market.
 
Moving past those issues, since the beginning of the year M&A has been a major driver of stocks' performance, although in a slightly peculiar way. In fact M&A speculation pushed up valuation not just of possible targets, but also of potential acquirers, defying the usual market logic of selling the buyers. It may have been the case that portfolios rotation at the start of the year, re-pricing of the recent tax reform and M&A all concurred to some pricing dislocation.
 
Arguably, despite the recent correction, valuations across the market, including the healthcare sector, remain high on average. However BB Healthcare managers unconstrained mandate allows them to handpick the best opportunities, keeping an eye on both structural trends and valuation metrics.
 
We expect BB Healthcare managers to increasingly focus their attention on small and mid-cap stocks, and particularly on companies that offer new cost-effective solutions for the delivery of healthcare as a service.

BB HEALTHCARE PORTFOLIO

After raising £150mn at the IPO back in December 2016, the Trust has subsequently raised a further £115mn through secondary offers and tap issuances.
 
Including the contribution of portfolio’s performance, BB Healthcare is currently managing approximately £300mn.
 
We are pleased to note that the management team has strengthened, as Paul Major and Daniel Koller were joined by Brett Darke, an experienced healthcare investor with a successful 10+ year track record.
 
Since inception, the Trust can also count on a highly qualified advisory board, led by world-renowned cancer doctor, Professor Justin Stebbing.
 
BB Healthcare portfolio strategy remains unchanged and well differentiated amongst the offering of investment products:
 

  • Portfolio concentration:  a maximum of 35 high-conviction ideas, picked from an investable universe of about 500 global healthcare companies
  • Unconstrained mandate:  whilst performance is matched against a global healthcare index (MSCI World Healthcare Total Return index in GBP), the management team retains full discretion on stock and sub-sector allocation
  • Dividend policy: by offering a dividend payment partly funded by capital, BB Healthcare can offer a superior yield to its investors, compared to what would be delivered by the underlying portfolio companies
  • Exposure to the broader healthcare themes: by focusing on US stocks (representing over 90% of the portfolio), BB Healthcare can offer UK and ex-US investors access to healthcare opportunities beyond the traditional bio-pharma and medtech sectors, that are largely absent from UK and European stock markets

Figure 1: BB Healthcare portfolio by market cap and geography as of 28 February 2018

Source: BB Healthcare February 2018 factsheet

As discussed in our initiation note, BB Healthcare decided not to hedge their currency exposure. Considering that their exposure to the USD is likely to be much higher than the benchmark global healthcare index, their FY 2017 performance was correspondently over-penalized by the sterling weakness. However the Trust follows a bottom-up approach with an investment horizon of 3-5 years, and we believe that management is rightly focusing on key industry themes and fundamentals rather than short-term currency volatility.
 
Leverage at the end of February 2018 stood prudently at 7.3%, well within the expected long-term 5-10% range.

 

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