Bellevue Diversified Healthcare (Lux)

MSCI World healthcare underperformed MSCI World in July 2023 by 207 bps (MSCI World Healthcare 1.3% vs MSCI World 3.4%). The Bellevue Diversified Healthcare Fund (B-shares; -0.9%) underperformed (-215 bps) its healthcare index benchmark net-of-fees.

The general market rally continued in July, led by Big Tech and cyclical sectors. On the US macro front, the Fed hiked interest rates by a quarter of a point in July, CPI has been trending down, and quarterly GDP growth was surprisingly strong at 2.4%. Healthcare continues to struggle in this late-cycle period, although we are starting to see fundamental headwinds abating across subsectors. 

The Bellevue Diversified Healthcare Fund underperformance in the month was driven by allocation/exposure across subsector and market capitalization, with the most significant headwind being the funds overweight in medtech.

There was significant dispersion in key healthcare subsector performance in the month, with biotech the most positive (4.5%). Life science tools and healthcare services delivered solid performances (3.9%, 3.1%, respectively). In a contrast, medtech, and to a lesser degree pharma, delivered negative absolute performances in the month (-0.6% and -0.1%, respectively).

Within the MSCI World Healthcare Index, large caps (USD 60-200 bn; 1.6%) performed best in the month, followed by mega caps (>USD 200 bn; 1.5%), and mid caps (USD 2-60 bn; 0.7%). Geographically, Europe healthcare significantly outperformed US and Asia Pacific (Europe; 2.7%, US; 1.0%, Asia Pacific; 2.6%).

Going into the Q2 results season the fund was overweight on healthcare utilization verticals after positive management commentary through the quarter. Medtech/hospital earnings were robust, but expectations proved to be too high. We have seen a sell-off in key fund names through the month, despite positive fundamentals. On the other side of the utilization trade, MCOs delivered better than expected results, a surprise given cautious management commentary mid-quarter.

The fund has an underweight on life science tools. As expected, Q2 results and guidance were weak for this subsector, but the stocks have reacted positively given an assumption of bottoming fundamentals. 

Amongst fund holdings, positive absolute performances in USD from Argenx (29.4%; positive CIDP trial), AbbVie (12.3%; positive Q2), Zoetis (9.5%; consumer confidence). Negative absolute performances from Sage (-26.2%; negative commentary ahead of PDUFA); Edwards (-13.0%; negative reaction to Q2 results); Penumbra (-11.8%; negative reaction to Q2 results). 

We have seen strong subsector rotation within healthcare, but improving fundamentals overall. Taking a step-back, with medtech fundamentals remaining strong, MCOs able to deliver strong earnings despite the utilization recovery, and life science tools fundamentals bottoming, this is positive for future sector performance overall.

Within large cap biopharma, we expect the more growthy/innovative names with catalysts to perform over the next few months. Medicare Part-D reform news flow in early September could create some near-term pressure for the group, but with some large drug development related catalysts also on the horizon, we see a mixed-to-positive picture in the next few months.

The SMID-cap space may continue to lag until interest rates role-over. While the general market view that the recent central bank target rate hikes could be the last, but the length of time that rates are held at these elevated levels unknown.  

For the mid-term, we remain confident in the funds tactical subsector tilt and the fundamentals for the stocks in the fund. Indeed, valuations now look more attractive. For the mid-to-long-term, we are still confident in holding a small overweight position in mid caps and overweight position in structural growth companies.