Polar Capital Global Healthcare reflects on year of transition – Polar Capital Global Healthcare, announcing its results for the year ended 30 September 2017, says that its NAV total return for the year amounted to 0.6% compared to a rise in the benchmark (the MSCI Global Healthcare Index) of 8.6%. Meanwhile their share price total return was 3.4% reflecting a narrowing in the discount from 5.4% to 2.8%.
They have paid out dividends of 2.4p in respect of the current financial year and they are declaring a further dividend of 1.0p which will be payable in February 2018. Total dividends for the current financial year therefore amount to 3.4p. In future they will be paying dividends in August and February rather than quarterly, reflecting the new investment objective. The new dividend policy will result in lower dividends in future given the focus on growth.
The managers say that they are “disappointed by our investment performance over the course of the fiscal year, which reflected a combination of three factors: poor stock selection, the sub-sector positioning driven by our investment mandate and one-off restructuring charges.”
Up until the restructuring of the company’s portfolio in June, they managed the portfolio according to the original growth and income investment mandate. 80% of the portfolio was invested in dividend-yielding stocks with a high weighting towards large pharmaceutical companies. The new mandate is focused on capital growth by investing in a diversified global portfolio of investments in healthcare companies with no restriction on sub-sector weighting. The portfolio continues to have a heavy weighting towards large capitalisation companies but there has been a significant reduction in the weighting to pharmaceutical companies – from 62% at the beginning of the period to 31% at the end of the period. The portfolio is now more diversified across the different healthcare sub-sectors.
In terms of sub-sector weightings, an overweight position in pharmaceutical stocks, healthcare REITs and healthcare facilities – with investments in companies with good dividend yields – were significant detractors to performance relative to the benchmark. They were also underweight in some of the better performing sub-sectors such as biotechnology, life sciences tools and managed care. This was driven in part by the focus on dividend yielding stocks in the original investment mandate.
Stock selection this year reflects some of the wide dispersion of returns that have been seen across the healthcare sector. The absolute performance of the top ten contributors was almost completely offset by losses from the top ten detractors.
The top three contributors over the reporting period were Sanofi, Abbott and Centene. Sanofi had very strong performance over the reporting period as expectations grew for its new atopic dermatitis drug, Dupixent, which was launched in mid-2017 and is expected to be a blockbuster. Sanofi continues to face pricing pressure and competition in its core diabetes business but Dupixent sales growth should help to offset this.
Abbott has also performed well over the reporting period as it has entered a new product cycle, enhanced by the recent acquisition of St Jude Medical, and now looks set for double digit earnings growth. The company has also exceeded expectations with its new glucose monitoring device, called Libre, which has had a good European launch with strong US sales growth expected in 2018.
Centene is a US managed care organisation that primarily focuses on the population that earns 400% of the poverty level or below. It is one of the leaders in providing Medicaid managed care services – Medicaid is a programme run by individual states for people on low incomes. Centene has consistently beaten earnings expectations over the last year and looks set for continued growth as it is one of the few health insurers that has managed to design profitable insurance products for the healthcare exchanges that were started under Obamacare.
The three largest detractors to performance were Teva, Astellas and Medtronic. Teva is the global leader in generic drugs but pricing pressure in the generics industry has put operating margins under pressure. They believed that Teva’s acquisition of the Allergan generics business in 2016 would enable it to stabilise the business through improved economies of scale. This has not been the case and they exited the position in February with a substantial loss.
Astellas is a leading Japanese pharmaceutical company that we have held since 2011. Astellas’ key growth driver has been a prostate cancer drug, Xtandi, and as sales growth has slowed the market has become more concerned by upcoming patent expirations of two of its other key drugs. As a result the shares have declined over the reporting period and they sold the position when they restructured the portfolio in June.
Medtronic is the global leader in medical devices and a stock they have held since 2014. They increased the position size substantially in June following the portfolio restructuring. Unfortunately, in July the company experienced some IT issues plus a delay in its diabetes business due to supply constraints. This caused it to negatively preannounce quarterly results and resulted in a downgrade to consensus estimates for FY2018 – the shares declined on the back of this news.
PCGH : Polar Capital Global Healthcare reflects on year of transition