Bellevue Medtech & Services (Lux)

April was a very weak month for equities worldwide (MSCI World Net -3.7%). After trading sideways during the first three weeks of the month, stocks came under pressure after Fed Chairman Powell said that the US central bank was prepared to raise the federal funds rate more quickly and decisively to battle inflation. The Euro Stoxx 50 (-2.0%) and Germany’s blue-chip Dax index (-2.2%) closed lower as well. The medtech sector (MSCI World Healthcare Equipment & Supplies -6.3%) held its ground till mid-month, when it turned sharply lower, mirroring its higher structural growth trend. Thanks to its dual focus on healthcare services providers and medtech companies, the Bellevue Medtech & Services Fund (-5.6%) beat its benchmark, despite the higher weighting of growth stocks in its portfolio.

US health insurance stocks continued to march higher in April. Cigna (+8.2%), Humana (+7.3%), Anthem (+7.3%), UnitedHealth (+4.8%) and Centene (+0.5%) all made positive contributions to the fund's performance. Their impressive performance in today's choppy market was driven by various factors. UnitedHealth, Humana and Anthem beat investor expectations for the first quarter thanks to lower medical cost trends and they all raised their earnings guidance for 2022. Second, yields at both the short and 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 (-10.1%) – detracted from the fund's performance after publishing lower-than-expected revenues and profits for the first quarter and lowering its full-year earnings outlook. Revenues were lower than forecast because COVID-19 patients generally had more mild forms of the disease, which led to a drop in treatment costs. Meanwhile, higher-than-expected costs for temporary or traveling 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.

As for the medtech investments, Procept BioRobotics (+6.8%), Terumo (+2.3%), Abbott (+1.1%), and Becton Dickinson (+0.1%) were the only medtech stocks that made a positive contribution to portfolio performance. Dexcom (-20.1%), Omnicell (-15.7%) and Abiomed (-13.5%) published good quarterly results, but their stock prices were still weighed down by macro factors. As were the stock prices of Shockwave Medical (-27.1%), Inspire Medical (-23.4%), Axonics (-13.0%), Tandem Diabetes (-12.8%) and Insulet (-5.8%), companies which have not yet published their latest quarterly results.

Quarterly results from Align (-33.5%) confirmed that consumers (even in China) are reining in their spending on Invisalign teeth straightening solutions, on top of problems in the company’s supply chain. Early indicators that the capital investment cycle might lose some momentum led Intuitive Surgical (-20.7%) shares lower. At the same time, Intuitive reported that the upturn in treatments/procedures observed in March continued in April. This prompted Intuitive to raise its forecast for full-year procedure growth in 2022 to 12-16% yoy. All performance data is in EUR / B shares.

The outlook for the 2022 investment year in the medtech & services sector is attractive. New cases and hospitalizations in key medtech & services markets (North America, Europe and Japan) have plunged as Omicron became the dominant strain of COVID-19. We believe that high immunity levels will enable a significant rebound in elective medical procedures in 2022. The sector’s risk-return profile is enticing for many investors.

Sector valuations are moderate and that offers opportunities, not just for investors; we also expect takeover activity to pick up because the valuation multiples of many small, fast-growing companies declined so much in 2021. Regardless of when the situation surrounding the pandemic and the geopolitical situation returns to normal, the sector-specific structural growth factors such as rising life expectancy and high rates of innovation will sustain the medtech & services sector's above-average growth versus the overall economy and power its high rates of profit growth.

The Bellevue Medtech & Services Fund invests in the entire healthcare market except for the drug developers. As a fully adequate healthcare investment vehicle, the fund aims to generate a significantly higher return than a traditional healthcare fund but with a comparable risk profile. The medtech & services sector is one of the stock market's most defensive sectors with sustainable outperformance potential and that is one reason for the unqualified success of our investment strategy. This and the additional growth from non-emergency treatments that had to be postponed during the pandemic create attractive entry points for investors.