Results analysis: Bellevue Healthcare

• Over the financial year to 30/11/2023, the NAV total return (i.e. including reinvestment of dividends) was -12.7%, whilst the comparator index (the MSCI World Healthcare total return index in Sterling) produced a total return of -7.1% representing an underperformance of 5.6% over the year. The share price (on a total return basis) fell by 15.1%, with the discount to NAV finishing the year at 10.3%, compared to the previous year, when the shares closed at a 7.6% discount.
• BBH has a performance objective to outperform the comparator index on a rolling 3-year basis, as well as deliver double digit returns over a rolling 3-year period. This is the third year that BBH has failed to beat the comparator index and the second that BBH has failed to generate double digit total shareholder returns. The poor performance during FY2023 pushed the trust into underperformance since inception when measured to the end of the fiscal year.
• BBH's ongoing charges figure for the financial year was 1.02% (2022: 1.04%).
• The trust targets an annual dividend of 3.5% of preceding year-end NAV, paid out in two equal instalments. The board has proposed a final dividend of 2.995p which will be paid to shareholders in May 2024, representing a total dividend for the last financial year of 5.99p. For the 2024 financial year, the board is proposing a total dividend of 5.04p. The lower dividend than last year reflects the fall in NAV and represents a prospective dividend of 3.3% at the current share price of 151p.
• 14.3% of the outstanding shares were redeemed at the annual redemption point of 30 November 2023. In addition, BBH bought back 16.4 million shares (or c. 3.4% of the company) during the financial year.
• The managers comment that the reporting period was yet another year where external factors and extraneous information served to pressure sentiment toward portfolio holdings for non-fundamental reasons. The managers state that “what we crave, more than anything else, is a bottom-up stock-driven market environment where operationally superior companies outperform poorer ones”.  •During the financial year, BBH held positions in 34 companies (compared to 37 in FY2021), beginning the year with 29 positions and ending the year with 27 (five additions and seven exits). Two of the seven additions during the year were reinvestments in companies that had been in the portfolio previously (Dexcom and Centene). Of the seven exits, two were due to M&A (Amedisys and Point Therapeutics). Of the remaining five exits, two were due to the companies reaching fair values, resulting in insufficient further upside to justify continued ownership. The remainder were cases where the investment thesis failed, or the company changed its strategic direction in a manner that the managers did not find compelling.

Kepler View

As the managers highlight in their report, the financial year ending 30/11/2023 “has not been smooth sailing”.  Fundamentals appear to be ignored by a market that is focusing on momentum and themes. This echoes the wider market, which is obsessed by developments in AI. In the Healthcare sector, it is GLP-1 obesity drugs which sees the market divided very simply into either obesity winners or losers. The managers state that they have “not seen anything quite so kneejerk since the tail end of the 1990s, and the similarly ludicrous 'old versus new economy' debate over emerging tech companies”.

Bellevue Healthcare’s (BBH) strategy remains to invest in `healthcare change'. More and more countries are becoming developed economies and scientific progress continues to open up new avenues to relieve the burden of human suffering, raising expectations of what products and services will be available to this ever-greater number of people. The managers observe that current healthcare models are neither easily scalable nor financially sound. Healthcare must therefore change. The tools, products and services that enable the re-imagining of healthcare are a persuasive investment opportunity. The past few years may have been very challenging, but BBH’s managers believe fundamentals remain attractive, and the last financial year is just one in which fundamentals were not recognised.

The managers have been taking advantage of market mispricing to position the portfolio as best they could to benefit from a recovery in sentiment. This is most evident in increased allocations to Tools, Healthcare IT and Healthcare Technology and the reduced exposure to Diversified Therapeutics. Activity saw a further downward drift in the median company size, and the material geographic bias to the United States increased, as the managers exited investments in Europe and Rest of World, whilst valuations in China continued to experience significant pressure. BBH has seen a welcome recovery in relative and absolute performance in the three months to the end of February 2024.

BBH has a highly differentiated and active strategy, noteworthy because of the highly concentrated nature of the portfolio, and its specialist focus. This inevitably means that the trust will go through periods of underperformance, which one might argue is a necessary part of delivering long term outperformance. The north star for the managers investment process is valuation, and in a market in which fundamentals are being ignored, it is perhaps not surprising that they are struggling to deliver outperformance. With a sustained recovery in sentiment, or fundamentals being reflected in share prices, one might hope that the previous track record of outperformance may return. In the meantime, the trust has best of class structural characteristics that in our view are very much on shareholders’ side. For example, management fees are charged on market capitalisation rather than Net Assets, and there is an annual tender opportunity for shareholders to exit at NAV.

Investing in the small / mid-cap area with a high active share means a strategy such as that employed by BBH will suffer disproportionately when there are headwinds. However, as the Chairman Randeep Grewal states in his statement, BBH will “hopefully benefit substantially with even a modest tailwind”. There are grounds for optimism that should the tailwinds we have seen over the last three months continue, the current discount to NAV of 6% may narrow, providing a kicker to improved returns.

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