BB Healthcare Trust PLC (LSE:BBH) has highlighted the skewed valuations across its sector amidst the current macro-economic volatility - in particular pointing to the relative underperformance of smaller company shares versus blue-chips.
The comment was made in the interim results statement, which showed that the trust’s value (represented as NAV total return per ordinary share) for the six month to 31 May 2022 declined by 16.1%, compared to the MSCI World Healthcare Index which gained 7.1% for the same metric.
The investment company, which invests mostly in listed mid-and-small cap healthcare stocks, reported its net asset value at 150.41p for the first half, down from 184.91p in the preceding six-month period.
“Small and mid-sized companies have materially underperformed their large and mega-cap brethren,” Paul Major and Brett Darke said in the interim results’ investment manager statement.
“This is partly a function of generalists seeking havens in defensives. In such scenarios, large liquid names are preferred and this helps to drive the dispersion in performance between the two groups.
“One could also make arguments for companies in need of short-term equity funding struggling more in a falling market and also for more highly rated stocks to fall further.”
“The key point to our minds is that whilst we are experiencing a divergence in share price behaviour, we are not seeing a commensurate divergence in operating performance; the fundamentals do not support the pattern.”
The managers added: “The company's strategy is centered around owning companies that are operationally geared into the adoption of a selected group of products, technologies and services that we believe are critical to the evolution of the healthcare delivery paradigm. Because our approach is 'bottom up' and focused around this theme of healthcare change, it was never intended to deliver correlated returns to the wider healthcare sector or the wider equity market.”
The investment manager noted that the composition of the company’s investment holdings is “the polar opposite” of the MSCI World Healthcare Index – with its portfolio comprising 15% ‘mega-cap’ companies and 8.5% ‘large-cap’ companies, versus 76% and 21% respectively in the MSCI basket.
Looking ahead, towards an expected turnaround, chairman Randeep Grewal meanwhile added: “At some point, market sentiment will improve, equity risk premiums will fall, and flows will stabilise.
“Meanwhile, it is incumbent upon us to prepare diligently and carefully - whether it be by ensuring the company has sufficient debt capacity to provide additional firepower when opportunities rise, or the team has interacted with, modelled and analysed sufficient companies to find the 'inevitables': those companies that will grow revenues, margins and profits (or achieve critical milestones for pre-revenue companies) in spite of any ongoing geo-political and macro-economic uncertainties.”