Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
WS Bellevue Healthcare Fund is the open ended version of the BB Healthcare Investment Trust and follows the same highly concentrated, benchmark agnostic bottom up approach within a thematic overview of inevitable and necessary change to the healthcare delivery paradigm. The Fund is managed by Bellevue Asset Management, which has a multi-decade track record as a healthcare-focused investment manager.
Healthcare is widely recognised as the apotheosis of defensive growth: there are ever more people and the world is getting older and richer. Once basic needs are met, people focus on staying healthy and there is thus a strong correlation between rising GDP/capita and the proportion that goes to healthcare.
Healthcare is mostly non-discretionary; consumption grows irrespective of the economic cycle. Finally, all of these long duration positive drivers are augmented by continuous innovation as we unlock the mechanisms underlying diseases, opening up new avenues for treatment.
However, several major issues need to be addressed with increasing urgency: the positive drivers mean that healthcare expenditure has grown, and will continue to grow faster than GDP in developed countries. If we cannot change this, then healthcare costs will consume an ever greater proportion of the wealth society creates.
This inflation is partly because current systems are not fit for purpose, with too little preventative care and too much reliance on increasingly scarce skilled labour. Delivery is hugely inefficient: 1 in 4 appointments are not medically necessary, 20-30% of all expenditure is wasted and around a quarter of frontline caregiver time is spent on administration.
It need not be like this; we have identified the key areas to intervene to bend the healthcare cost curve and invest into companies that offer operationally geared exposure to products, technologies or services linked to the transformation of healthcare, which is well underway.
How are you positioning your portfolio for 2022 and what will be key issues for investors?
The fourth quarter of 2021 and early months of 2022 have been characterised by elevated volatility and marked underperformance of mid-cap growth stocks within the healthcare sector relative to their large cap peers. Whilst various market pundits have tried to suggest this is linked to certain macro trends (such as, rising rates, inflation, pro-cyclical bias as the economic recovery gathers pace), most of these are irrelevant to a defensive growth sector like healthcare.
Healthcare innovation is typically led by smaller, more specialised companies, making this a very unusual dynamic and one that has not asserted itself for any length of time during prior periods of mid-cap underperformance. As such, we see the current ‘mid-cap malaise' as a very interesting longer-term opportunity, especially since we cannot find a credible reason why the sector should behave in this manner.
With this in mind, we have been increasing our gross exposure through higher leverage and re-orienting our portfolio toward stocks whose valuations have been disproportionately impacted by this unusual macro-led factor behaviour. We have also added a number of new companies to the portfolio at depressed valuations, whilst being mindful to add across healthcare sub-sectors to keep the overall portfolio exposures broadly unchanged.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
Some of the valuation dislocations that we are seeing in the current environment are very compelling, especially in what we refer to as ‘Focused Therapeutics', which includes the GICS sub-sectors of Biotechnology and Specialty Pharmaceuticals. The innovative pre-commercial companies have been particularly hard hit through the aforementioned sell of mid-cap healthcare; the US NASDAQ Biotechnology Index has fallen 30% from its September 2021 highs. In comparison, the broad MSCI World Healthcare Index has fallen only 10% from its highs at the end of 2021.
Amidst this dynamic, some key newsflow events at the stock level have been missed and this has created some compelling opportunities. We would highlight Jazz Pharmaceuticals, a mid-sized company focused on epilepsy, sleep disorders and oncology as very attractively valued and Sarepta Therapeutics, which is one of the leading protagonists in advancing gene therapy as a treatment modality as one of the most under-appreciated opportunities in the biotechnology sector.
Both companies made significant business development strides during the prior year and have provided data to the market that should go a long way to assuaging certain concerns that investors had overly focused on during that time. However, neither stock has yet been rewarded for these disclosures.
This post is sponsored by Bellevue