Bellevue Healthcare: Positioned for a significant recovery 

BBH is positioned for a significant recovery once healthcare fundamentals kick in again…by William Heathcoat Amory

Overview

 
Bellevue Healthcare (BBH) represents a distinct proposition within the AIC Healthcare and Biotechnology sector, and it is clearly differentiated from its peers. Aside from having a number of what we consider as best-in-class structural features (see Discount and Charges sections), the managers fundamental and research-driven approach to stock picking means that this is a highly active growth strategy that offers exposure to many niche opportunities not found in other portfolios.

The BBH strategy centres on investing in those companies operationally geared to the fundamental changes that we are likely to see in ‘broken’ healthcare systems over the coming decades, and those tackling these problems head-on, by meeting the demands of ageing societies but also helping efficiency and healthcare getting more or better for less, improving productivity, and adapting to new care delivery models – key dynamics shaping the healthcare system of tomorrow. The mandate is wide, enabling the team to invest in any company which provides products or services that support the delivery of healthcare in some form. Over time, BBH typically has higher exposure to mid- and small-cap stocks, reflecting their propensity over time to grow faster than large- and mega-cap companies.

The team have employed a consistent process since launch in 2016, but as we discuss in the Portfolio section, higher volatility in these mid- and small-cap names has prompted two small changes to the process, with the aim of delivering better risk-adjusted returns. The introduction of greater portfolio diversification around core themes, combined with more dynamic trading in response to event risks, has already reduced observed NAV volatility, according to the managers.

Performance issues aside (see Performance section), the managers continue to believe that the strong fundamentals of portfolio companies are there, and long-term investors will be well rewarded over time. BBH’s mid-cap bias and concentrated portfolio continue to differentiate BBH from peers.
 

Analyst’s View

 
BBH represents a truly active exposure to the healthcare sector, with stock decisions taken purely on fundamentals, rather than what represents a big part of the benchmark index. As we discuss in the Performance section, over the last couple of years, the focus on small- and mid-cap stocks has hurt performance, but over prior years the managers’ fundamental stock picking delivered good results. The tweaks made to the process appear sensible, and are geared more at risk mitigation than changing how the team look at potential companies. As such, we take the view that this does not represent a material change to the otherwise long-term investment process that has underpinned the strategy since launch.

Valuations for the healthcare sector are at multi-decade lows, both on an absolute and relative basis. This creates a unique opportunity for long-term investors seeking exposure to innovation-led growth in the sector. BBH’s shares typically traded at a premium to NAV prior to 2022, thanks to strong performance and a differentiated offering. Its shareholder-friendly features have meant that BBH has shrunk quite considerably, having achieved net assets of north of £1bn, now at the current level of £200m. The discount to NAV proved persistent until recently, when BBH’s board announced it would implement a zero-discount policy, which has been effective in closing the discount. With discount volatility eliminated, investors can focus on the fundamental attractions of the investment proposition.

Paying a dividend worth 3.5% of the NAV from capital, BBH provides an interesting and unusual combination of an income stream, paired with exposure to the potential of high-growth underlying companies and themes. Paying the dividend from capital gives the managers full flexibility over how they manage the portfolio without being hampered with an income target. With very low valuations seen across the portfolio (and the wider healthcare sector), if investor attention focuses on fundamentals once again, BBH has the potential to shine once again, with sector valuations nearing multi-decade lows, according to independent benchmarks.

Bull

• High-growth potential with rate cuts or more visibility from Trump policy important possible catalysts
• Specialist managers with long experience in the sector
• Strong commitment to managing the discount

Bear

• An active approach increases the potential for underperformance as well as overperformance
• Gearing increases downside risks as well as return potential
• Focus on a single sector and dominance by one country (the US) brings specific risks

View the latest research on BBH here >
 

_Disclaimer

_{Disclosure – Non-Independent Marketing Communication}

_{This is a non-independent marketing communication commissioned by Bellevue Healthcare. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.}