Edinburgh Worldwide’s healthcare and tech focus delivers over interim period

Baillie Gifford-managed Edinburgh Worldwide (EWI) delivered an NAV return of 16.4%, over the six-month interim period to 30 April 2020 (the shares increased by 21.7%). Over the same period, EWI’s comparative index, the S&P global small cap index, declined by 12,9%.

The top-five holdings at the period-end were:

The top allocations by sector were as follows:

Portfolio highlights

EWI made the following comments, in the manager review section:

“Several of the portfolio’s larger holdings posted encouraging developments over the period. Tesla shares have performed strongly on the back of some healthy production numbers and an improving cashflow profile (albeit with some near-term challenges as covid-19 has restricted production). We have a renewed enthusiasm for the business and see a clear medium-term roadmap for production of around 1.5 million cars per annum, a near tripling of existing volumes. The speed and ambition with which Tesla has recently been able to build a production facility in China contrasts hugely with the ongoing inertia of the automotive incumbents regarding electrification. While some competing products have appeared from the likes of Nissan, Audi and Jaguar the sizable price premium these automakers place on their electric offerings hints at the growing competitive strength of Tesla. Teladoc announced the acquisition of Intouch Health in a cash and share transaction. Intouch extends Teladoc’s reach beyond the GP clinic and into US hospitals and healthcare providers. Through interacting with electronic records and various medical equipment/datasets, Intouch has built a sophisticated offering with a higher technology component than that used in a typical GP-centric telemedicine offering. Although Intouch is initially complementary to Teladoc’s existing business we are intrigued by the potential long-term synergies that could build given Teladoc’s prominent position as the leading Telemedicine company for healthcare payors and, now, providers. Alnylam Pharmaceuticals announced that the FDA had expedited the approval of its second RNAi drug, Givlaari, for treating a rare debilitating disease called Porphyria. Subsequently Alnylam also announced it had sold a portion of the royalties it had been set to receive from a RNAi-based Cholesterol lowering therapy expected to be launched by Novartis. The sizable cash inflow of $1 billion from this sale represents an attractive source of non-dilutive funding and gives further firepower to develop its exciting pipeline of RNAi therapies.

We alluded earlier that some of our holdings had proved exceptionally resilient, even advantaged, by the fallout of the coronavirus pandemic. Although such a scenario was clearly not part of our original hypothesis it is emblematic of an exogenous shock being a catalyst for behavioural change and the push for better and cheaper alternatives. Heightened volatility and liquidity-induced stress in bond markets has helped drive increasing volumes towards MarketAxess’s bond trading platform. The enforced closure of education establishments has increased the importance of online learning tools provided by Chegg. The covid-19 crisis has pushed Telemedicine to the top of the agenda in the provision of large swathes of healthcare. As both patients and care givers increasingly place a premium on engagements outside of conventional medical practices we think there is growing recognition that a “virtual first” model, as developed by Teladoc, can represent a highly relevant channel for future care. Closer to home, business at Ocado has seen a marked acceleration and we would expect this to help underpin increased inbound interest in their platform for grocers all around the world. We also note that Alnylam (via its partner Vir Biotechnology) has begun studies into the potential of its gene-silencing platform to block the covid-19 virus from replicating. Earlier R&D efforts have shown their RNAi drugs can be inhaled and delivered to epithelial cells lining the lung thereby providing a potential route to limit the most damaging respiratory symptoms of the virus. Albeit still an untested hypothesis, this approach could be significantly easier to both validate and manufacture compared to a vaccine.”

‘Covid-19 melting away inertia’

“Covid-19, with its enforced and abrupt change in behaviours, is highly relevant in that it simultaneously strikes a direct challenge to embedded scepticism and acts to melt away inertia. The result is a removal of a bottleneck and an openness towards new and better ways of doing things. Some changes will be fleeting, but many elements are likely to be of a much longer duration and will underpin wide-ranging changes in areas such as how we shop, travel, learn, operate businesses and treat disease. Accordingly, we view a significant outcome of the current crisis as being an acceleration in the underlying rate of change occurring in the world. In the sphere of business and commerce this is likely to be expressed through a quickening in the ascendancy of digital platforms and innovative, nimble disruptors. This will be matched by a hastening in the demise of stale, structurally-challenged, frequently-indebted incumbents.

This acceleration will be neither uniform nor linear. In holdings such as Tesla and Zillow, we believe we own companies that will ultimately be long term beneficiaries of this acceleration even if near-term operational pain is inescapable given the artificially curtailed environment. We are comfortable being patient supportive shareholders in these businesses and believe that they have the flexibility to emerge from these challenges, most likely with their competitive positioning strengthened. In businesses such as Teladoc and Ocado (explored in more detail below) the current environment has near-term benefits alongside a significant unlocking of longer-term opportunity as their offerings morph from merely being alternatives to that of highly valued necessities.

The portfolio’s performance at present is striking compared against its respective index over the past six months. We believe this partially reflects an investment environment that, for the foreseeable future, will be in fast-forward mode further driving a widening divergence between the emerging winners and the structurally challenged. In backing companies championing a wide breadth of technology and innovation we feel we remain on the right side of this fast-forwarding. Furthermore, we actively avoid the numerous structurally challenged or overtly cyclical companies whereas the index, by default, cannot.

Beyond the immediate effects of the crisis, we believe two observations are likely to be most impactful on the portfolio over the coming years. First, as noted above, an acceleration in the rate of change is likely in many areas. Were this to simply be viewed as a bringing forward of the inevitable then the investment implications would be limited to a thesis around the time-value-of-money: something that would be helpful but not transformational.  Rather, we think the bigger prize is less likely to be the growth rate itself but more the implied accelerated evolution in the competitive dynamics in areas of huge opportunity. covid-19 is likely to be the catalyst to a massive digitally-powered landgrab with the winners anointed over the next 2-3 years versus what might have ordinarily taken 10+ years. Such an acceleration will significantly limit the number of players that could feasibly enter these markets and will ensure that the spoils accrue to a smaller number of existing participants (such dynamics will likely apply in retail, software, healthcare and beyond). The strong-getting-stronger is a well-documented phenomenon observed in previous downturns. Our impression is that this is likely to be an even more prominent feature this time around.

Second, we would reiterate the earlier observation that at times of crisis enforced adaption drives a lasting change in behaviours and propels a new wave of business opportunity. The current portfolio comprises numerous interesting companies that span the frontiers of innovation and disruption as we currently see them. But we are confident that many more opportunities will emerge over the coming years, in a large part inspired by the challenges the world is facing. In this regard we feel that the current portfolio and investment approach is as relevant as it has ever been.”

EWI: Edinburgh Worldwide’s healthcare and tech focus delivers over interim period