BB Healthcare (BBH ) managers Paul Major and Brett Darke have refocused their portfolio towards ‘essential medicines’ and increased their cash pile as they grow increasingly cautious about the ‘faintly ridiculous’ notion that life is returning to normal after Covid-19.
The £939m specialist investment trust run by Switzerland’s Bellevue Asset Management may have banked index-beating gains in 2020 but they are not expecting another stellar year, although they remain confident in the long-term prospects of their sector.
The investment trust’s net asset value (NAV) jumped 20.5% in the year to 30 November, almost doubling the 10.3% return delivered by the MSCI World Healthcare index, despite writing down its entire holding in NMC Health (NMC), which collapsed in the wake of fraud and embezzlement and is now subject to a criminal probe.
The investment duo said despite their own due diligence, they could only rely on audited reports that turned out to be a misrepresentation as the company was in $4.5bn of debt that was not disclosed. They recommended a total write-down of their stake ‘due to the uncertainty of ever receiving any value from the resolution of the sorry tale’.
Fortunately, the setback was offset by the managers quickly reducing gearing – or borrowing – debt, as markets crashed in the pandemic panic last March. They remained cautious with a net cash position as the markets recovered, wary of high valuations and excitement over a return to normal. Cash remained at around 9% at the end of January.
The rapid recovery ‘reduced our level of comfort with the market’, particularly with areas in healthcare such as elective surgical procedures, where treatment could easily be postponed, and companies that were pandemic winners, such as telemedicine and testing.
While valuations were an obvious issue, Major (pictured) and Darke were also worried about the positive sentiment around a return to healthcare ‘normalisation’ by the end of 2020 and running into 2021.
‘With the inevitability of multiple waves of [Covid-19] and the reality that winter respiratory diseases peak in January and February, this seemed faintly ridiculous to us,’ they said.
‘We thus re-oriented the portfolio away from these areas toward essential medicines and services provided under long-term contracts.’
The switch included the US-dominated portfolio selling positions in Teladoc and Pacific Biosciences, which had both reached high valuations. The pair also sold Align Technology and Intuitive Surgical, although they admitted the exits ‘seem premature given their subsequent share price performance’.
‘However, the capital was deployed into other names and those contributed to our overall positive performance,’ they said. ‘Moreover, the doubts that we had regarding the consensus outlook for these companies’ growth is still there.’
The managers said they also took the decision to run a higher level of cash than normal as, despite leverage being a smart way to boost returns, ‘this is only the case when one is confident that the overall direction of the market is positive’.
‘Following such a rapid recovery, we were worried that there may be another correction and that, at best, the wider sector would go sideways for some time,’ they said.
‘As things stand today, we are more concerned than relaxed…the logistical and execution risks around a return to normal are not insignificant.’
The fund managers may be concerned but they believe healthcare will continue to thrive and valuations in the sector ‘have never looked more attractive’ on a relative basis.
BBH launched at the end of 2016. Over three years, it has delivered 89.5% to shareholders, more than double the 41.4% from the MSCI World Healthcare index. The shares stand on a 3% premium over net asset value, a fact that has enabled the company to steadily issue new shares to meet investor demand.
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