BB Healthcare

BBH has a differentiated approach to a secular-growth theme...

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by BB 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.

BB Healthcare

BB Healthcare Trust (BBH) is a differentiated trust within the AIC’s specialist Biotechnology & Healthcare sector. The managers invest in companies providing new approaches to what they view as fundamentally broken healthcare systems around the world.

AS we discuss in the Portfolio section, the managers employ a highly active approach to stock-picking on a global basis. It’s a concentrated portfolio, holding a maximum of 35 stocks which are at times augmented by gearing (to a maximum of 20%). The managers are entirely benchmark-agnostic, therefore the current portfolio has high exposure to the US (94.4%) and no specific bias (in absolute terms) in terms of market capitalisation.

Returns since the December 2016 IPO have been strong, and are ahead of the trust’s twin objectives set at the time of launch. BBH has performed significantly ahead of the benchmark, delivering strong absolute returns and outperforming both its UK-listed healthcare peers over three years.

Discount volatility since launch has been muted, thanks to an annual redemption facility which allows investors to exit close to NAV at each year end (30 November). However, as we show in the Discount section, over the short term the discount can widen.

BBH seeks to achieve high total returns over the long term, whilst also paying a dividend to shareholders. The portfolio’s organic yield’s relatively low, but BBH has so far achieved a consistent dividend through paying it from capital at a rate of 3.5% of the year-end NAV. At the current price this equates to 4.1%. BBH is the only diversified healthcare trust with such a dividend policy, and its yield is thus materially higher than peers’. The board has said it’s committed to this high yield for the long term.

Kepler View

BBH offers a compelling investment proposition, which is expected to benefit from long-term secular tailwinds. Demographics and, more recently, the dire economic constraints governments around the world are likely to find themselves in make this trust a potential candidate for long-term investors seeking to achieve high total returns.

Having launched in late 2016, the trust doesn’t have a particularly long track record, although Bellevue Asset Management has more than 25 years’ experience of running a concentrated investment-trust strategy with its Swiss-listed BB Biotech vehicle. BBH has come out of the blocks fast, and has put in a strong performance so far. Being a ‘newbie’ also means that the trust has several shareholder-friendly, and in our view attractive, features: low discount volatility, high dividend security and transparent fees.

Ultimately however, the differentiated and focussed investment thesis as well as the highly active manner in which it is employed should be the main attractions for investors. The NAV has a slightly higher volatility than peers, but as we show in the Performance section, the Sharpe ratio shows that the managers are using this extra risk well. On the other hand, discount volatility is likely to be minimised by the annual redemption option.

In conclusion, BBH is not the cheapest in its sector, but in our view is very much worthy of consideration for investors wanting a differentiated high-growth exposure to what we view as a secular-growth story.

BULL BEAR
Highly active approach and focussed investment thesis Limited track record of manager prior to launching trust
Good track record so far Dividend based on NAV, which means it will likely fall if NAV also falls year on year
Attractive dividend (albeit paid from capital) Gearing and the concentrated portfolio can mean potentially high volatility in NAV
William Heathcoat Amory
William Heathcoat Amory is a co-founding partner of Kepler Partners LLP and leads the Kepler investment trust research team. William has 18 years of experience as an investment company analyst. Prior to co-founding Kepler Partners in 2008, he was part of the Extel number 1 rated research team at JPMorgan Cazenove.

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This report has been issued by Kepler Partners LLP.  The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

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