Bellevue Medtech & Services (CH)

The Bellevue Medtech & Services Fund CH retreated 3.8% in April and was thus weaker than its benchmark (-1.9%), the healthcare sector as a whole (+0.5%), and the broader stock market (-3.3%). Healthcare services contributed 1.0% to the fund's monthly performance and medtech names made a negative contribution of 4.8%.

Investors bought up US health insurers, which led to positive contributions to the fund's absolute and relative performance from Cigna (+8.6%), Anthem (+7.7%), UnitedHealth (+5.1%), Humana (+2.2%) and Centene (+0.9%). Their excellent performance in April amid the current market environment was driven by various factors. To begin with, UnitedHealth, Humana and Anthem all beat investor expectations for the first quarter thanks to lower medical cost trends and they raised their earnings guidance for 2022. Second, yields at both the short and long end of the curve climbed higher, as already seen in March. Two-year US Treasury yields, for example, rose 40 bps to 2.7% in April and this should have a positive impact on the interest income from health insurers’ investment portfolios. Third, given the tense geopolitical situation, investors continue to favor companies that generate all of their revenues and earnings in the United States, which is the case for the US health insurance industry.

The largest hospital chain operator in the US – HCA Healthcare (-9.8%) – diminished the fund's performance after publishing lower-than-expected revenues and profits for the first quarter and lowering its outlook for full-year earnings. Revenues were down due to less complex and thus less expensive treatments of coronavirus patients in the wake of the Omicron variant. Higher-than-expected costs for temporary nurses squeezed the company’s profit margins. The contracts US hospital operators have with health insurers give them little leeway to pass through higher expenses. But HCA's good management has proven before that it can quickly and efficiently lower the company’s costs.

Turning to the fund's medtech exposure, only Abbott (+1.5%), Becton Dickinson (+0.5%) and Boston Scientific (+0.2%) made positive contributions to portfolio performance. Abbott and Boston Scientific beat investor expectations for first-quarter organic revenue growth and earnings per share.

Align Technology (-29.9%), Idexx (-17.0%), Intuitive Surgical (-16.4%), Dexcom (-15.8%), Inspire Medical (-15.5%) and Edwards Lifesciences (-5.3%) were performance detractors. Align flagged customer reticence in both patients (Invisalign teeth aligners) and dental practitioners (intraoral scanners). Intuitive Surgical sold fewer surgical systems in the first quarter because many customers had placed their orders in the final quarter of 2021 instead.

In January and February, the number of elective surgical procedures was lower than expected due to the COVID-19 resurgence triggered by the Omicron variant. While we have observed a strong rebound in these procedures in March and April, the recovery is likely to be a bit slower than expected. At the same time medtech companies reported higher material and logistics costs. The weaker investor sentiment toward medtech names can be traced to these two factors. In addition, companies with relatively higher valuations have experienced sharp markdowns.

In the healthcare services segment, we believe US health insurers offer the most upside potential. Key value drivers here are the rapidly growing number of members and the fast premium growth in Medicare Advantage plans among the 65 and older population, a high level of resistance to inflation thanks to contracts that shield health insurers from an increase in healthcare costs, and earnings accretion thanks to rising short- and medium-term bond yields.

In the medical technology space, we expect to see a strong rebound in surgical procedures thanks to a sharp decline in COVID-related hospitalizations and high levels of population immunity. This should more than offset the impact of higher materials and logistics costs. We additionally expect numerous approvals and market launches of relevant products for diabetes and structural heart disease.