Market and sector review

After getting off to a very strong start in January, global equity markets turned negative in February. A flight to safety characterised much of the month: cyclical sectors significantly underperformed their defensive counterparts and large-cap stocks outperformed small and mid-caps. This sudden rotation away from riskier areas of the market benefitted the healthcare sector which outperformed the broader market in February.

The trading within healthcare reflected a similar risk-off attitude by investors: pharmaceuticals, biotechnology, healthcare services and distributors performed strongly, while life sciences tools and services, healthcare supplies, managed care and healthcare facilities posted negative returns.

Multiple factors contributed to the abrupt change in direction of the market. First, the US macroeconomic picture became more complicated with data pointing to a weakening consumer (both in terms of spending and sentiment), a cooling of the labour market (lower job openings; higher jobless claims; non-farm payrolls declining) and a hotter than anticipated inflation number. While GDP growth seems to be resilient, the aforementioned data points could portend a more stagnant US economy.

Second, corporates reported end-of-year results and issued outlooks for 2025 that led many analysts to downgrade their earnings expectations across most sectors. Finally, political noise became louder, with President Trump touting broad tariffs that would significantly hamper imports into the US and could stoke inflation once again.

The near-term volatility is uncomfortable, but the conviction that healthcare is a defensive sector that is innovating and has attractive growth prospects should not be missed amid the distractions.In healthcare, US politics dominated the narrative. The new administration confirmed Robert F Kennedy Jr as its health secretary, blocked part of the funding for the National Institute of Health, cancelled February’s meeting of ACIP (Advisory Committee on Immunization Practices), a key meeting where decisions on vaccines are made, and ramped up the pressure on finding ways to cut costs within the healthcare system, with a particular focus on Medicaid. Given the added threat of tariffs and a fairly mixed earnings season, it is perhaps unsurprising that investors fled to areas of healthcare which are considered more defensive and less exposed to political uncertainty.

Fund performance

The Company’s NAV decreased by 3.8% in February, compared to its benchmark, the MSCI All Country World Daily Net Total Return Health Care Index, which was down 0.2% for the month.

Positive relative contributors relative to the benchmark in February were Thermo Fisher Scientific, Merck and Merus.

The Fund had no exposure to either of the first two, both of which had a challenging month. There was no thesis-changing news for Thermo Fisher Scientific, a company that continues to struggle alongside its life sciences and tools peers, with the key concerns appearing to be China and the state of NIH (National Institutes of Health) funding.

Merck’s weakness follows a disappointing FY24 update, when it disclosed that it has temporarily paused shipments of an HPV (human papillomavirus vaccine), Gardasil, to China.

Clinical-stage oncology company Merus performed strongly, with the only news of real note being the US Food and Drug Administration (FDA) awarding key pipeline asset Petosemtamab a ‘Breakthrough Therapy’ designation for the treatment of head and neck cancer.

Negative relative contributors in the period under review were Medley, AbbVie and Stevanato Group.

Medley’s struggles were in direct response to FY24 results that missed expectations, coupled with FY25 guidance that came in below consensus expectations.

The Fund had no exposure to AbbVie during February, a company that rallied strongly alongside other large-cap biotechnology and pharmaceutical stocks given their defensive characteristics.

There was no thesis-changing news on Stevanato Group during the month.

We added positions in US distributor Cardinal Health and US-based medical device company NeuroPace during February. In a healthcare subsector with less exposure to political rhetoric than others, Cardinal Health has been delivering consistent earning upgrades, has multiple growth drivers and we believe it is attractively valued.

NeuroPace focusses on the treatment of epilepsy using a system that responds to a patient’s unique seizure fingerprint. The additions were funded, in part, by exiting positions in Amvis Holdings and Intelligent Ultrasound Group.

Outlook

It is no understatement that February was extremely challenging from an investment perspective. Uncomfortable macroeconomic updates, especially at the consumer level, sporadic tariff stress and an administration that is potentially looking to generate significant savings in areas of healthcare such as the NIH and Medicaid have all created levels of uncertainty that were hard to predict.

The near-term volatility is uncomfortable, but the conviction that healthcare is a defensive sector that is innovating and has attractive growth prospects should not be missed amid the distractions.