Bellevue Healthcare Strategy (Lux)

Global stock markets came under selling pressure again during the final month of a challenging (investment) year. The broad MSCI World stock index tumbled 7.2% (in CHF) over the month. The healthcare sector was not as weak, which also applies to its full-year relative performance, but the MSCI World Health Care Index still shed considerable ground in December (-4.3%). The Bellevue Healthcare Strategy Fund (Lux) beat its benchmark but gave up ground too (-3.1%, I shares).
 
Several central banks raised their interest rates to try to bring inflation under control, moves which had been broadly anticipated, but the monetary tightening in Japan stood out as the big exception – and the general commentary regarding further central bank action in 2023 likewise cast a cloud over sentiment in the stock market. That was mainly to blame for the widespread selling pressure both in the benchmark and in the fund's portfolio. Relative performance was helped by a slight recovery in the portfolio's China holdings after the country began to ease its zero-COVID policies. Already in November the portfolio holding Horizon Therapeutics (+10%) reported that it was in negotiations with several potential buyers. The outcome of those negotiations is now known: Amgen announced on December 12 that it had reached an agreement to acquire Horizon for USD 27 bn. We closed the position in Horizon later in the month and then opened a new position in Intuitive Surgical. December was a month of shadows and light for Gedeon Richter (+1.6%), a Hungarian company in the fund’s portfolio: together with its distribution partner Abbvie, Gedeon Richter announced on December 17 that Vraylar had been approved by the US FDA as an adjunctive treatment for major depressive disorder. Unfortunately, there was also some negative news on December 24: The Hungarian government, in an effort to plug some holes in the state budget, is imposing a windfall tax on drug producers based on net revenues in 2022 and 2023 – which Gedeon Richter will also have to pay.

The investment process for the Bellevue Healthcare Strategy Fund resembles the rules-based investment process that Bellevue has successfully applied since 2007. In this approach, the 40 most attractive stocks in the healthcare sector worldwide are selected every six months. The Bellevue Healthcare team screens about 600 of the 4000 listed companies in the healthcare sector worldwide based on four quantitative criteria (PEG valuation, price/sales, sales growth and EBITDA/sales) and four qualitative criteria (assessing the company's management, product pipeline, operating risks and country-related risks). The ten most promising stocks from four different regions – Western Europe, North America, Japan/Australia and emerging markets – are selected. The maximum weighting of the region with the highest overall score, which is usually North America, is capped at 35% during the periodic rebalancing, which increases the emphasis given to emerging markets. Companies with rich valuations and low growth rates will rarely be selected for the portfolio. Mid cap stocks have typically represented 60-80% and the Asia region approximately one-third of the portfolio. Pharmaceutical stocks are clearly underweighted compared to the MSCI World Healthcare Index. Bellevue has applied this investment approach since April of 2007 and it is used to compile the Adamant Global Healthcare Index.