Market and sector review
Global equity markets ended the first half of the year with a strong month. The information technology sector continued to drive markets higher in June, helped by the consumer discretionary and communication services sectors. Given the generally risk-on attitude of investors, unsurprisingly, sectors that are deemed less cyclical, such as utilities, consumer staples and healthcare, underperformed. However, counterintuitively, the “risk-on” sentiment did not spill across smaller-cap stocks, which lagged their larger peers in the month, taking their year-to-date underperformance to a staggering 13.6% (as measured by the Russell 2000 Index versus the S&P 500 Index). As hinted, healthcare lagged the overall market, with biotechnology, pharmaceutical, managed care and healthcare equipment leading the way, while healthcare information technology, healthcare supplies, healthcare facilities and life sciences tools and services had a more challenging month.
The US macroeconomic picture remains highly dynamic, however, save any meaningful change in trends, it is still uncertain whether the Federal Reserve (Fed) has managed to achieve an “immaculate disinflation”. Pointing in favour of the Fed are the facts that inflation continues to surprise to the downside, PMI figures are robust and consumer sentiment and confidence seemed to have swung more positive. On the other hand, unemployment ticked up reaching 4% despite new jobs creation remaining elevated and pointing to a tight labour market, and actual retail sales were weak which would point to slower GDP growth, since consumer spending accounts for over two-thirds of US GDP. With the upcoming presidential election adding to the uncertainty, the Fed stance is for now unchanged, holding rates steady and waiting for additional data points to inform its next move.
Fund performance
The Company’s NAV was up 4.8% in June, ahead of the benchmark (MSCI All Country World Daily Net Total Return Health Care Index) which was up 2.7% for the month (both in sterling terms).
The main positive contributors in June relative to the benchmark were Zealand Pharma, Argenx and Insulet. Zealand Pharma’s share price was catalysed by the release of top-line data for a phase one trial studying pretelintide, a novel oral weight-loss medication with a differentiated molecule (amylin) to the existing GLP-1 class. The asset demonstrated not only robust efficacy in terms of weight loss, but more importantly it had a very benign safety profile and was well tolerated – the latter being one of the main issues with GLP-1 drugs. The company will advance pretelintide to a phase two trial in the near future.
Argenx’s move was driven by the FDA approval of its main drug, Vyvgart, in a new indication called CIDP (chronic inflammatory demyelinating polyneuropathy), a debilitating disease with limited or burdensome treatment options.
Finally, Insulet’s share price reflects improving sentiment among investors as management, at various events, talked with a confident tone on the near and long-term prospects for the company, especially as they presented excellent data that could allow Insulet’s latest insulin-delivery system to be approved for patients with type two diabetes.
The fundamentals for healthcare outperformance are very much intact, helped by nearer-term dynamics such as higher utilisation, new product cycles and a renewed appetite for consolidation.
Negative contributors were Novo Nordisk*, BioMerieux and DexCom. Novo Nordisk* performed well, with investors weighing the opportunities the GLP-1 class could offer outside diabetes and obesity. Data presented at the American Diabetes Association demonstrated the benefits of the GLP-1 class in a range of diseases and complications (chronic kidney disease, obstructive respiratory apnoea, diabetes progression, etc). Additionally, as its GLP-1 molecule is currently in short supply, the news that the company plans to expand manufacturing capacity was taken positively by investors.
BioMerieux was caught in the sell-off of French stocks as French President Emanuel Macron called a snap parliamentary election, which could hand over parliament to the right-wing National Rally Party. There was no news concerning DexCom specifically, with the stock perhaps suffering from ADA data showing GLP-1s can slow the progression of diabetes and from a competitor gaining US approval of an over the counter continuous glucose monitor.
In June, we added new positions in Merus, Avidity Biosciences, and Terumo. The latter is a Japanese medical device company with core competencies in cardiovascular, medical care solutions, and blood and cell technologies. The company is expected to deliver strong growth and significant operating leverage, but we believe there is upside to consensus expectations on the back of continued robust performance of its cardiovascular portfolio, underappreciated contributions from its CDMO (Contract Development and Manufacturing Organization) business and higher sales for its highly-innovative plasma donation machine. The recent pullback in the stock offered an attractive entry point.
Merus was bought as we believe there is significant potential for its drug to treat head and neck cancer, with a recent data update in combination with another drug producing best-in-class data.
Finally, Avidity Biosciences was purchased on the potential of its pipeline of three clinical programmes to treat orphan disorders with significant unmet needs. The additions were funded by exiting the position in Takeda Pharmaceutical, 4D Molecular Therapeutics and Xenon Pharmaceuticals.
Outlook
For the first six months of the year, a lack of breadth has characterised markets, with a handful of companies propelling equity indices higher. This trend has been visible also in healthcare, creating a large dispersion between the winners and the losers. This large dislocation offers compelling opportunities and has strengthened our belief that an active management approach to the sector remains key to unlocking such opportunities. The fundamentals for healthcare outperformance are very much intact, helped by nearer-term dynamics such as higher utilisation, new product cycles and a renewed appetite for consolidation. If the AI frenzy starts to moderate and the pace of growth of the global economy keeps on slowing, we believe the case for healthcare becomes even more powerful.
* not held
