Article04 Sep 2024

Healthcare innovation thrives despite volatility - August Trust Update

James Douglas

Fund Manager

Gareth Powell

Head of Healthcare

Market and sector review

August was a very eventful month, characterised by a spike in volatility (the VIX index soared over 135% in the first few trading days) and an abundance of market-moving news. Despite all this, global equity markets ended the month in positive territory, thanks mainly to traditionally defensive sectors such as consumer staples, financials, utilities and healthcare, all of which outperformed the overall market. Within healthcare, pharmaceuticals, facilities and equipment had strong returns, while healthcare distributors, life sciences tools and services, healthcare services and biotechnology delivered more muted performances.

Volatility was the main feature of the market, especially in the early part of the month, driven by the unwinding of the carry trade. This is a strategy of borrowing money in a country with low interest rates (in this case, Japan) and buying assets in a country with higher interest rates (in this case, the US). As long as the interest rate difference remains stable or increases and is not offset by a strengthening of the borrowed currency, the trade makes positive returns. However, this was upended when the Bank of Japan raised its interest rate by 0.15% and hinted at possible further hikes. This sent the yen up significantly, a move that was exacerbated by traders trying to cover their positions by buying back yen. The strong rerating of the Japanese currency also caused a mini crash in the equity market, which saw the stock market lose over 12% in a single day (the biggest one-day fall since Blue Tuesday in 1987) as investors ditched Japanese stocks with international exposure that had benefitted from a weak yen.

August was also rich in macroeconomic news from the US, where the employment data was under the spotlight after the non-farm payrolls disappointed and the unemployment rate came in at 4.3%, well ahead of expectations. We would argue that the higher than expected unemployment figures are perhaps more a reflection of elevated supply, driven by immigration and prime labour force participation, rather than a significant slowdown in demand. In fact, economic growth remains very healthy (Q2 GDP growth rate was revised up to 3%), jobless claims are in line with recent averages, consumer spending is robust and inflation continues its downward trend.

A healthcare sector that continues to innovate, has strong demand-driven fundamentals and for the most part delivered strong financial results during the recent earnings season.

However, it is clear that the Federal Reserve has now shifted its focus away from inflation to the other half of its dual mandate – employment – as Chair Jerome Powell made it explicit at Jackson Hole that the Fed “do not seek or welcome further cooling in labour market conditions”, and therefore the time has come to adjust monetary policy by cutting rates. Unsurprisingly, this was a welcome message for investors and sent stocks higher towards the end of the month.

Fund performance

The Company’s NAV was up 2.7% in August, behind the benchmark (MSCI All Country World Daily Net Total Return Health Care Index) which was up 3.1% for the month.

The main positive contributors in August relative to the benchmark were Swedish Orphan Biovitrum, Acadia Healthcare and Pfizer. Swedish Orphan Biovitrum shares benefitted from positive clinical data for a drug in rare kidney diseases that it co-commercialised with Apellis Pharmaceuticals*. Second quarter results that were ahead of expectations catalysed Acadia Healthcare’s shares higher. The company not only posted strong admissions growth but also improved pricing and had a more stable labour environment. Not holding Pfizer contributed to performance as it experienced setbacks in its infectious disease pipeline.

Negative contributors in the period were Medley, ICON and Zealand Pharma. Medley posted underwhelming Q2 results, with good top-line growth but disappointing margins due to increased costs in the business. However, management reiterated its full-year guidance and we remain confident on the long-term outlook. There was no material news concerning ICON. Zealand Pharma saw both profit-taking and weakness on the back of fears of heightened competition for one of its key pipeline assets in obesity.

We initiated a position in Novo Nordisk during the month, taking advantage of the recent pull-back. Attractively for the growth on offer, and with multiple catalysts ahead, the addition also increases the more defensive positioning adopted of late. As a reminder, we recently initiated positions in Fresenius SE, Roche and Sandoz Group, all of which have strong, defensive qualities. The new holding in Novo Nordisk was funded with sales in Align Technology, Amgen, Becton Dickinson and CSL.

Outlook

While unwelcome, the recent volatility should not distract investors’ attention away from a healthcare sector that continues to innovate, has strong demand-driven fundamentals and for the most part delivered strong financial results during the recent earnings season.

* not held

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James Douglas, PhD
James joined Polar Capital in September 2015 and is a Fund Manager for the Healthcare team. He was appointed co-manager for the Polar Capital Global Healthcare Trust in August 2019.
Prior to joining Polar Capital, James worked in equity sales specialising in global healthcare at Morgan Stanley, RBS and HSBC. James also has equity research experience garnered from his time at UBS, where he worked as an analyst in the European pharmaceutical and biotechnology team. Before moving across to the financial sector, he worked as a consultant for EvaluatePharma.
Gareth Powell, CFA
Gareth joined Polar Capital in 2007 to set up the Healthcare team. Prior to Polar Capital, Gareth worked at Framlington, where he began his career in investment management in 1999. Soon afterwards, he joined the Healthcare Team in 2001 and helped launch the Framlington Biotech Fund, which he managed from 2004 until his departure.
Gareth studied biochemistry at Oxford, during which time he worked at Yamanouchi, a leading Japanese pharmaceutical company (later to become Astellas). As well as this, Gareth worked for the Oxford Business School and various academic laboratories including the Sir William Dunn School of Pathology and the Wolfson Institute for Biomedical Research.