BB Healthcare (BBH) trust is a differentiated specialist trust, with many best-in-class features, that offers exposure to a secular growth theme. At the same time, in certain circumstances healthcare may provide a measure of defensiveness during a prolonged recession. Taken together, this means the portfolio may provide a complimentary exposure to other healthcare, or growth-focussed trusts or funds.
The managers (Paul Major and Brett Darke) invest in a concentrated portfolio of companies providing innovative ways to transform what the managers view as a fundamentally broken global healthcare system. That said, when evaluating investments, the managers are valuation aware. Market dynamics over recent months have meant that many cutting-edge small and mid-cap companies that have traditionally been too expensive for the team to consider, are now at more reasonable valuations allowing Paul and Brett to buy into them. As a result, the portfolio has rarely been better exposed to higher quality or more transformational science and the managers are genuinely excited about the opportunity for these companies.
Over the short term, relative performance has lagged. However, over the long term, the NAV performance has been strong and BBH has consistently outperformed the benchmark and its peer group as well as delivering good returns in absolute terms. BBH exhibits higher historic volatility than peers and the benchmark owing to the managers’ highly active approach, but the risk adjusted returns show the managers are adding value for this increased volatility with a class-leading sharpe ratio.
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 3.1%.
BBH has many best-in-class features including low discount volatility, high dividend security and a simple and transparent fee structure. It also offers access to a specialist team in an area of the market that is innovating rapidly, which offers the potential for very attractive multi-year returns.
Historic returns since launch have been strong relative to peers and the benchmark, but investors need to be aware that the NAV has also demonstrated higher volatility than the market, making it likely best suited to those looking to the long term. The managers are very clear that they invest in a rolling three-year view. Over the short-term performance has lagged the benchmark. 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).
Certainly, the same factors that have led to BBH’s underperformance have enabled the managers to invest in high growth companies at less demanding valuations. When we caught up with the managers recently, they were audibly excited about the opportunities, commenting that the portfolio has never been better exposed to higher quality or more transformational science. In our view, the characteristics of the trust make it a strong potential option for exposure to the healthcare sector. As we discuss in the Dividend section, the trust also pays a significant income (from capital), which means it offers diversification for income investors too.
|Very differentiated offering, with highly active approach||Narrow focus, and concentrated portfolio presents risks relative to more diversified portfolio|
|Excellent long-term track record||Dividend based on NAV, which means that if the NAV falls year on year, it could mean a decline (although the board could choose not to pay a lower dividend)|
|Attractive dividend yield (albeit paid from capital)||Potential to gear, combined with concentrated portfolio, can translate into high NAV volatility|