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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Bellevue Healthcare. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

In the classic 1951 movie ‘The Day the Earth Stood Still’ an inexplicably Brylcreemed humanoid alien descends from the steps of a spaceship onto The White House lawn with an urgent message for humanity – that it must end its march toward nuclear Armageddon and live in peace with the universe.

Were he to return, it is hard not to imagine that – performing some cursory research into what he had missed since his last visit by reading a few newspapers – he would pull on the handbrake and turn his ship around before he got here.

Despite the assurances of scientists that Delta – precisely because it is so effective at infecting us – is likely to remain the dominant form of COVID-19, the threat of a new, scarier, more deadly variant is never far away from the front pages.

At the same time the stunning success of the vaccine programme and the protection that this affords to everyone – whether that be in limiting symptoms dramatically or preventing infection entirely – is routinely ignored, apparently on the grounds that good news is no news.

Culture war spilling over from America, cold war with China, jihad from Afghanistan, rising seas, forest fires, droughts, and the heat-death of the planet all jostle for space at our breakfast tables which, incidentally, are somewhat sparse thanks to a shortage of CO2, petrol and HGV drivers.

Hyperbole sells papers, though and the team at BB Healthcare (BBH) think closer observation of the facts, not the headlines, supports a more positive outlook.

Whilst there is a great deal of (understandable) concern about the prospect of a ‘fourth wave’ as we head into winter time, the team are sanguine on this threat.

“The UK does deserve some credit around its medical response to the pandemic. We have had the lowest Case Fatality Rate (CFR) in Europe for some time now and we continue to have the highest proportion of the adult population vaccinated in our peer group – ignoring countries like Malta which really aren’t comparable.

“And are the vaccines really beginning to wear off? Whilst cases in the +65 age group have risen they remain far below the last peak and the current dominant strain is much easier to catch. If this non ‘apples to apples’ comparison is evidence of waning vaccine efficacy then it’s pretty weak in our view. The pattern [of cases] strongly supports the argument that vaccination has broken the link between infection and serious morbidity.”

This is a crucial element of their optimism. “What should matter now is how sick people get and, these days, the answer is generally ‘not very’ which is why we are not seeing thousands of hospitalisations and deaths per day any more, and why the ‘worst case scenario’ models were so wide of the mark.”

Against this improving backdrop for humanity, the managers are optimistic about the condition of their portfolio, despite a difficult few months for the trust. BB Healthcare takes a high conviction, unconstrained approach targeting an annual dividend of 3.5% via a focused portfolio of global healthcare companies, never more than 35 strong.

The portfolio has a very high active share (>90pc) versus the benchmark and over half its assets are held in small and mid-cap companies defined as those with an AUM below $10m. This is using the closed-end structure to full effect, allowing the managers to invest without much regard to the size or liquidity of investee companies and is a marked differentiator versus peers which tend to have much larger companies among their holdings.

This type of smaller, more innovative company has been out of favour in recent months – during which time more defensive large-cap diversified companies have dominated.

Undeterred, however, the managers have taken advantage of depressed valuations by shifting the positioning of the trust toward companies with ever-more-transformative potential, and they remain optimistic that their outperformance of the benchmark will come back.

The team have added nine new names over the calendar year to date, amongst them companies which they hope will dominate their niches in the years to come. In fact, when we caught up with the managers recently they commented that, as a result of the new holdings, the portfolio has never been better exposed to higher quality or more transformational science. They are genuinely excited about the opportunity for these companies, which if successful they believe could appreciate by 5-10x over the next five years.

“We are not investing on a six month view, and the longer term results attest that we have, in general, owned the right companies over the past five or so years.”

Since launch in December 2016, the trust has delivered NAV total returns of 122.3% against the 86.2% return of the benchmark MSCI World/Healthcare index (to end July), consistently ahead of the challenging 10% per annum target the managers’ set for themselves.

Our analysts think the trust offers solid potential: “In our view, there is nothing to suggest that the managers’ investment process is not repeatable, and so this could be an interesting juncture if investors believe that their pattern of outperformance will revert, as has happened after prior periods of underperformance (e.g. Q4 18, Q2 20).”

To learn more about BB Healthcare and the managers’ approach, click here to read our latest piece of research on the trust...

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