BB Healthcare 07 March 2022

BB Healthcare (BBH) is a high conviction, unconstrained, long-only vehicle invested in a concentrated portfolio of healthcare companies that the managers believe provide innovative solutions to what they view as ‘broken’ healthcare systems around the world.

As we discuss in the Performance section, the sell-off in markets we have experienced has been indiscriminate – especially amongst mid and small-cap stocks to which BBH is largely exposed. As a result, BBH’s NAV has underperformed over the short term, although the managers’ long-term track record against the trust’s twin objectives remains strong.

The managers’ view is that “history will look back on this moment as a fantastic relative opportunity for long-term healthcare investors”, and so have been adding to gearing (see Gearing section). The team have marginally increased the number of stocks in the portfolio (to 33), as well as invested more capital in portfolio constituents in the specialist diagnostics, biotechnology and services sectors. In our view, this illustrates their confidence in long term prospects, but also that they are truly fundamental stockpickers.

Since launch, a large part of the dividend has been funded from capital, giving the managers flexibility to pursue the best total returns they can achieve from the investments they make. The target dividend for the 2022 financial year is 6.47p, representing a yield on the current share price of 3.65%.

As a result of the volatility in markets recently, BBH’s shares currently trade on a discount of 6%, which compares with a one-year average premium of 1.2% (Source: Morningstar).

BBH’s exposure to mid and small caps marks it out from peers and the benchmark but also explains the relative performance over the last six months or so. Over the long term, mid and small-cap companies are expected to grow faster than large ones, and the healthcare sector is no different. However, at times, market sentiment can mean small and mid-cap stocks can fall significantly faster than larger, more liquid stocks – especially in liquidity-driven markets. The managers are fighting these headwinds currently but appear resolute in their belief that the historically strong returns delivered from their investment process will revert.

Since launch, a large part of the dividend has been funded from capital. We observe that this enables shareholders to benefit from a regular income but does not hinder total returns by the managers having to invest in dividend-paying companies with lower growth prospects. As such, BBH offers a very complimentary exposure to equity income investors, with an attractive level of dividend derived from capital and an underlying exposure that is very different from typical income exposures to the healthcare sector.

BBH has exhibited higher volatility than its peers. However, the managers have used this extra risk well and delivered attractive risk-adjusted returns historically, with a higher Sharpe ratio than their peers. Investors who share the conviction of the manager in the medium to long term fundamental prospects of the portfolio companies may see the current discount level of 6% as an opportunity, given the long-term average premium to NAV that the shares have traded at historically.