BB Healthcare Trust PLC (LON:BBH) said its portfolio managers feel the point is close at hand where the investment opportunity will outweigh the risks with regard to the economic effects of coronavirus.
In an ad hoc statement on Friday, the investment trust’s managers Paul Major and Brett Darke from Bellevue Asset Management, said they were currently “trying to cut through the shorter-term noise to pose some fundamental questions around the risk versus the longer-term opportunity moving forward”, including pondering “when is the opportune time to deploy additional capital”.
Having worked during the market crashes in 1999, 2001 and the global financial crisis, the pair said the level of anxiety and uncertainty we see around us “feels of a profoundly different magnitude” and they believe the world will return to a ‘new normal’ afterwards as “certain businesses and consumer behaviour simply will not survive in their current form”.
The trust, which is a concentrated long-only vehicle invested in listed or quoted global healthcare equities without unconstraint as to market cap, sub sector or region, said asset prices “look very attractive in many areas of healthcare”.
“We stand ready to deploy additional capital, but with caution. We are aware that substantially increasing the leverage of the trust in what remains a volatile period is not necessarily the right way to go, but we are increasingly comfortable to begin to deploy some borrowings and would very much welcome any additional capital through tap issuance that may be undertaken pursuant to the current prospectus.”
The managers said they “did what we could to mitigate” the recent market volatility, within the boundaries of trying to remain fully invested, which is a commitment at the time of the trust’s launch in 2016.
When adjusted for a 2.425p dividend per share to be paid on 9 April, BB Healthcare’s net asset value has declined 16.0% during the quarter versus a 7.3% decline for the MSCI Healthcare Index.
Major and Darke noted that it is less dramatic if compared to the market correction in the fourth quarter of 2018 when the trust’s NAV fell 20.0% versus a 7.6% decline for the MSCI Healthcare Index.
Over a longer-term outperformance, the trend is positive however, with a total return for shareholders of 69.1% from inception to 19 February 2020 versus 57.9% for the MSCI World Healthcare Index.
Long-term demographic and societal drivers
The trust’s managers pointed out that since 19 February, pharma and biotech have outperformed wider healthcare, although speciality pharma has lagged.
They wonder if a near-21% sell-off of a defensive sector that was already trading at a relative valuation discount to historical averages versus the wider market is really warranted, viewing it as likely to be partly because of an “overhang” of concern about Bernie Sanders proposal for ‘Medicare For All’ despite Democratic rival Joe Biden’s progress toward securing the nomination and his opposition to the policy.
Looking forward, the pair are sanguine about the long-term drivers for the trust’s investments.
“When the dust settles and Covid-19 has thankfully become a historical consideration, the ‘new normal’ will still feature the same demographic and societal drivers of a growing and ageing population.
“These point strongly to a continuation of the existing multi-decade trend of increasing consumption of healthcare resources; it is as close to a demographic certainty as one could find.”