Bellevue Healthcare 30 June 2023

Over the medium term, the healthcare sector benefits from the secular tailwind of the desire to provide for an ever older and richer human population. However, Bellevue Healthcare Trust (LON:BBH) offers a very differentiated way to get exposure to this theme, because of the manager’s preference for running a highly concentrated portfolio (a maximum of 35 stocks), and a willingness to invest across the market capitalisation spectrum (see Portfolio), but more importantly, because they focus on the most operationally geared investments whose product, technology, or service best contributes towards bringing healthcare systems onto a sustainable footing, on a multi-year basis.

Since launch, BBH’s managers Paul Major and Brett Darke have generally delivered on their objectives: to beat the total return of the MSCI World Health Care Index on a rolling three-year period and also deliver double-digit returns over the same time frame. That said, as we discuss in the Performance section, the team have underperformed more recently. Within the healthcare sector, two GLP-1 obesity plays (Eli Lilly and Novo Nordisk) have accounted for all of the performance of the benchmark so far this year. In the context of BBH, which has an active share of 91%, it is perhaps no surprise that in a market driven by a very narrow number of stocks, BBH finds itself behind the pace.

BBH has typically been modestly geared on a net basis, with the ambition to run a mid to high single-digit level of gearing over time. The team reduced exposure in May/June 2023 with the uncertainty presented by the US debt ceiling deadline, and gearing currently sits at a mere 0.9%.

BBH is highly differentiated from its benchmark and peer group through its strong bias towards focussed companies, aiming to provide innovative solutions which lower cost inflation in the healthcare ecosystem, driving efficiency gains, and/or producing better outcomes for patients. Small- and mid-cap stocks are where the greatest level of innovation and growth potential lies within the healthcare industry, but the trust’s exposure to small and mid caps has counted against the trust in current markets. As such, the long-term performance of the fund has taken a knock. As we illustrate in the Performance section, BBH does demonstrate significantly higher volatility than the benchmark, but this extra risk taken on by the managers has historically been rewarded by outperformance.

With a consistent investment process, in order to outperform over the long term, it is sometimes inevitable that short-term underperformance needs to be endured – especially at times when fundamentals are ignored by a market that is driven by macro factors. It is precisely this sort of scenario that the managers believe we are in currently.

In our view, given nothing has changed in terms of the personnel or investment process, when the market stops being driven by macro factors, as inevitably it will at some point, there is clear potential for Paul and Brett’s alpha generation to kick back in once again. In the meantime, BBH’s discount to NAV is c 6%. As such, investors who share the managers’ conviction in the medium- to long-term prospects may therefore see the current discount level as an opportunity.