BB Healthcare 10 February 2021

BB Healthcare Trust (BBH) is a highly actively managed trust, seeking to exploit a long-term secular growth theme. The managers (Paul Major and Brett Darke) invest in a concentrated portfolio of companies providing new approaches to transform what they view as fundamentally broken healthcare systems around the world.

Using the closed-ended structure, Paul and Brett aim to take a longer-term view than the market. That said, the pandemic has shone a light on trends that they have long thought likely to emerge. As we discuss in the Portfolio section, the experience of seeing a GP during lockdown shows the potential for the NHS to save significant amounts of money on ‘digital first’ consultations, illustrating how models of care might soon shift very significantly to the benefit of many of BBH’s portfolio companies.

That said, the managers’ valuation-aware approach to growth investing means they are currently cautious, as evidenced by the portfolio’s defensive positioning and cash levels of c. 9% (see Gearing). The team believe capacity on the supply side (especially elective operations that can be easily delayed without risk to the patient’s life such as hip or knee replacements), and a longer time than people expect to ‘return to the norm’, will lead to some companies’ revenue and earnings expectations being revised down over the near term.

BBH targets a Dividend payout equal to 3.5% of the prior financial-year-end NAV. This dividend is funded from capital reserves, and the current target of 6.03p equates to a dividend yield of 3.2%. The strong Discount control mechanism (an annual redemption option every November), as well as good demand for the shares, has meant BBH’s shares usually trade close to NAV. It has been issuing shares this year, meaning we expect the ongoing Charges to be marginally lower this year than last year’s 1.19%.

BBH’s managers, Paul and Brett, are specialists in what is a complex field. It is an area of the market that in our view offers highly attractive secular growth opportunities, which are likely to prove resilient and to some extent unlikely to be derailed by the economic cycle. The team employ a highly active approach to stock-picking on a global basis, with a very concentrated portfolio.

As we discuss in Performance, returns since the December 2016 IPO have been strong, and are ahead of the trust’s twin objectives. Despite the various macro headwinds all investors had to contend with, 2020 saw a continuation of this strong performance, with BBH performing significantly ahead of the benchmark and its directly comparable investment trust peers, which we think amply demonstrates the resilience of the strategy even in the most challenging of market conditions.

In our view, the differentiated investment approach and highly concentrated portfolio have been key contributors to this sustained success, but also add to risks. The statistics bear this out; whilst BBH’s NAV volatility has been higher than peers (making it more suitable for long term investors), the superior Sharpe ratio demonstrates that the managers have used this extra volatility to good effect for investors.

Aside from performance, BBH has several shareholder-friendly features including low discount volatility, high dividend security and a simple and transparent fee structure. Over the short term, BBH’s positioning arguably offers an interesting exposure to benefit from a post-pandemic recovery, without the risks that other ‘defensive’ sectors (such as consumer cyclicals) present.