Worldwide Healthcare Trust Plc – 29 April 2014
Worldwide Healthcare Plc (WWH) is a London listed investment trust which seeks to achieve capital growth, over income, through investing in health care-related securities on a global basis. The trust’s investment mandate requires the lion’s share of assets to be invested in equities. However, derivatives and other types of securities do feature in the portfolio.
WWH has been established since 1995 when it began life as Finsbury Worldwide Pharmaceuticals Trust. Over time the investment manager has adapted the mandate for the trust to incorporate investment in alternative growth areas such as biotechnology, health-care equipment and primary care providers. The investment managers are Frostrow Capital and OrbiMed Capital LLC.
|Benchmark||MSCI World Health Care Index||Ticker||WWH.L||Latest Close||1251.00|
|52 Week High||1408.00||52 Week Low||995.00|| Exchange||London Stock Exchange|
|Dividend Yield %||1.32||Dividend (Pence)||16.50||Discount to NAV %||3.81|
|NAV (29th April 2014)||1286.13|
Strong Trends in Global Health that Can Drive Portfolio Returns
While many tend to view health care as a subject for discussion with their doctor, strong trends in population demographics and public health across the globe have made the area an attractive proposition from an investment perspective.
It is these trends that have been driving expectations of increasing demand for health-care services over the years ahead and the consequent anticipation that spending from both the public as well as private sectors will continue to rise over time.
This creates an opportunity for established pharmaceuticals, primary care and equipment providers, as well as many of the emerging, research and development-led biotechnology companies that have proved popular with investors over recent years.
Today’s report illustrates in greater detail some of the key drivers for health care returns, while providing a price target for WWH, along with an overview of why we prefer the trust as a means of exposure when compared with individual shares.
Macro Driver: Baby Boomers, Ageing Populations and their Implications
The advent of the baby boomer generation (born between the 1950s and 1960s) has seen post-war populations in western countries swell to record levels throughout the latter half of the twentieth century. While this generation can be credited with having achieved many things in terms of economic development throughout their lifetimes, one of the less attractive points of recognition is the financial burden which, during retirement, they are expected to place upon later generations.
It is this burden that is now projected to drive increased demand for primary care, medical equipment and pharmaceuticals over the decades ahead. The pending retirement of this large demography is also set to coincide with a period of increased life expectancy, due to medical developments, over the coming years.
This has the potential to magnify the financial impact upon the current health care demand of a large ageing population, which supports the argument that spending will increase persistently over time in order for current standards of care and provision to be maintained.
While this has negative implications for fiscal balances across the affected nations, it is likely to prove positive for drug developers, manufacturers and primary care providers. This is because, we feel, that despite the best efforts of governments, overall spending on health care-related services is more likely to rise than it is to actually fall, and that the most likely cause of this will be, among other things, a slow migration from public and toward private sector funding.
In addition to this, we also feel that the current level of public sector funding for certain kinds of disease, which can affect all age groups, is likely to remain protected. The most likely recipients of this protected funding will be those areas which focus on the prevention and treatment of NCDs (Non-Communicable Diseases) such as diabetes, cardiovascular disease and cancer.
The rationale behind this thinking, in relation to age-related spending, is that a reduction in available funding is likely to have little to no impact upon demand dynamics and could lead to the creation of a potentially lucrative “gap in the market” which would invite private sector providers and insurance.
Further on the subject of protected funding, World Bank data has repeatedly highlighted the proliferation of NCDs as the leading cause of lost economic output among developed economies.
Given the necessity with which many of the world’s higher income countries must reduce budgetary deficits and borrowing, following decades of overindulgence, and the importance of improvements in economic output in order to do this, governments are well incentivised to maintain funding for research and development as well as preventative and curative treatments when it comes to NCDs.
The below graphics illustrate OECD (Organisation for Economic Cooperation and Development) projections relating to the percentage of national populations which are expected to be over the age of 65 by the year 2050, as well as the differential in life expectancy at birth, by country, between the years 1970 and 2013.
The final graphic illustrates World Bank projections for lost economic output across the income spectrum as a result of NCDs over the decades ahead.
OECD Figures on the % of National Populations Expected to be Over the Age of 65 by 2050
Life Expectancy at Birth in OECD countries; 1970 (black diamond) VS 2013 (red bars)
World Bank Projections for Increases in Lost Economic Output across the Income Spectrum over the Decades Ahead
Macro Driver: Modern Diet and Lifestyle Trends Driving Death and Disease Rates in the Wrong Direction
While the higher economic output of developed nations has led to persistently better standards of living over the years, the impact upon population health has not been so positive. As incomes and living standards have grown positively, diets have deteriorated. As a result, the presence of many nutrition and lifestyle -related diseases are now on a par with, or in some cases greater than, developing nations.
High consumption of sugar, saturated fats, tobacco and alcohol has led NCDs such as diabetes, cardiovascular disease and cancer to become the leading cause of death globally. OECD research estimates that cardiovascular disease alone was responsible for 33% of all deaths worldwide over the last year.
Although there are multiple influences upon the onset of cardiovascular disease and diabetes, obesity is believed to be highly correlated with these. As a result, the progressive expansion of waistlines globally is believed to provide a strong indication of the likely prevalence of the more common NCDs in future years. Based upon current childhood obesity statistics, the prevalence of NCDs in future years is unlikely to recede. (See below charts)
“Added sugars now represent 17% of a normal US diet” – Credit Suisse Research Institute, Sugar Consumption at a Crossroads
Although the above trends do not bode well for the fiscal health of national governments, they do provide an indication of the likely future demand for healthcare products and services, which is positive for investors in pharmaceuticals companies as well as primary care and equipment providers.
The first two of the below OECD graphics illustrate the growing rates of both childhood and adult obesity across countries over the last decade. The final two graphics illustrate the prevalence of diabetes across the countries, as well as the consequent increase in pharmaceuticals demand.
OECD Figures Detailing Growing Prevalence of Obesity in Developed Nations
Macro Driver: Population Growth
Persistently declining birth rates within high income countries have been the source of much media attention over recent years, most notably because of their potential to reduce the future working population and future tax revenues, consequently exacerbating existing fiscal constraints among developed nation governments throughout the decades ahead.
This fixation has led to the tendency among both investors as well as observers to forget that, although birth rates have reduced from the levels seen between 1950 and 1980, the overall global population is still growing and this is not expected to change within the near future.
United Nations’ forecasts estimate that the current pace of growth, if held constant, will see the global population rise from 7.2 billion in 2012, to 9.6 billion by 2050, representing an increase of 33% over 38 years. This alone is supportive of expectations that health care demand and spending will continue to rise steadily over time.
Although much of global health expenditure today takes place within developed markets, it is middle income and emerging nations where populations are growing the fastest. This is while healthcare systems across many of these regions remain, in most cases, underdeveloped.
Although we believe that developed market spending on health and medical care will also continue to grow over time, the most natural conclusion to draw from the above is that more of today and tomorrow’s opportunities for investors lay further afield than ever before, which makes an international horizon critical to successfully leveraging investment.
The below graphics are provided by the World Health Organisation (WHO) and the Population Reference Bureau (PRB) based in Washington DC. The first two graphics illustrate projected changes in global population density between 2013 and 2050. The final two graphics illustrate the correlation between life expectancy and health care spending.
2013 Population Density By Country
Projected 2050 Population Density By Country
Expenditure on Health as % of GDP
Life Expectancy By Country
The current healthcare environment provides a multitude of opportunities for investors looking to exploit strong and established trends in both population health and demographics over the medium to longer term.
Although these trends exist, they do so on a global scale and gaining an adequate exposure to these can entail taking on board higher degrees of risk, and is likely to prove both capital and time intensive.
For these reasons, we prefer investment trusts over individual equities when it comes to investing in the healthcare sector, and have selected Worldwide Healthcare Plc (WWH) as the first of those which we will review over the coming months.
Performance: WWH Retreats in Line with Benchmark on Biotech Valuations, off from March Highs
Although WWH has performed well on a consistent basis over recent years, trading at a premium to NAV on numerous occasions throughout 2013, the shares have pulled back from their March peaks and a modest discount is now available. While the discount is still below its targeted level of 6%, the outlook for the vehicle over the broader term remains positive.
The trust provides a cost effective means of exposure to a sector which offers strong growth prospects, which would otherwise entail the active management of an entire portfolio. It also benefits from an experienced management team, with significant levels of experience in the health care sector. This has helped it to consistently outperform the benchmark MSCI World Healthcare Index over a ten year period.
The current asset allocation employed by the investment manager sees the trust highly leveraged to one of the biggest growth areas in health care through a concentrated portfolio, heavily weighted toward US biotech and pharmaceuticals businesses.
Close to 40% of assets are held within the portfolio’s top ten holdings, while 10% of this is split between the top two. Each of these appears to be quality companies, with strong biases toward drug development for NCDs such as diabetes and cardiovascular disease, as well as communicable diseases including HIV and Hepatitis.
This high concentration in this area, in our view, illustrates the manager’s ability to leverage high conviction ideas. This is a positive feature for those with the requisite risk appetite for such a strategy.
WWH Hourly Chart
The Trust has traditionally targeted a discount to NAV of 6%. However, it has traded at a premium to this on numerous occasions throughout the past year which in itself is not such a negative thing. In this case, we view it as a reflection of market confidence in the vehicle’s future prospects given the positive performance of the last 24 months.
Following repeated sell offs in the US biotech sector over H1 2014, WWH has pulled back from its earlier peaks. At present, a discount of close to 4% is available. It is worth noting that this current differential between NAV and share price is still below the targeted discount of 6%, which indicates that the potential for this to widen further over the weeks and months ahead exists.
This would either involve depreciation in the share price or non-performance of shares in the face of an improving NAV (Net Asset Value).
In terms of debt, the gearing level permitted by the investment mandate is 20%, while up to 5% of NAV can also be invested in derivatives at any one time, in order to boost returns or to hedge risk. Current gearing stands at 13%, which is positive because it leaves room for the investment manager to leverage up in order to take advantage of further opportunities, without the interfering with the existing portfolio.
The 13% gearing value is also positive because it indicates the manager has not been idle in the face of a rising market and is again, willing to leverage opportunity and high conviction ideas.
There are a number of risks which have the potential to impact upon the performance of WWH, particularly over the near to medium term. Among the most prominent of these are the expiration of patents in the pharmaceuticals industry, market concerns over valuations in the biotech sector, fiscal consolidation among developed market governments and the potential for this to lead toward lower spending across the UK, US and Europe.
Although it is not possible to completely discount the likely impact of these risks upon the health care sector, there are some mitigating circumstances to consider which provide scope for these effects to be reduced.
In respect of expiring patents, the recent burst of speculation surrounding M&A activity within big Pharma highlights the potential for consolidation within the health care industry. Should this become a more predominant theme over the coming quarters then much of the negative pressure surrounding patent expiration could potentially soften.
In terms of valuations, the biotech industry has suffered in line with the wider technology sector throughout the early sell offs in 2014. Given that concerns still exist, on a blanket basis, over valuations and future earnings prospects for many of these companies, it is difficult to provide any reassurance against this risk. In short, if weakness or panic were to return to the market once again, then indiscriminate selling could impact upon the trust’s holdings. This, however, would not be expected to materially alter the medium and longer term outlook for the sector.
In relation to budget cuts and spending, while official figures confirm that government spending in Western Europe is already reducing, we expect funding for the prevention and cure of NCDs to remain well insulated given the likely economic impact of any cuts in this area.
While the same applies to the United States, the reduction in spending that results from cuts to public sector funding for other areas here is also likely to be more than offset by the projected growth in private expenditure over the near to medium term.
In addition to the above, given the Trust’s international focus, exchange rate risks are also an important factor in the risk profile of WWH. Given the changing, and in some cases diverging, policy outlook across the UK, Europe and the US, FX risk is likely to become more of a dominant theme in the realms of corporate earnings and investment returns.
Despite that, it is within the trust’s investment mandate to make use of derivatives, not just to maximise returns, but also to hedge against risk; most of WWH’s FX risk is accrued through exposure to the foreign exchange risks and hedging capabilities of the underlying (portfolio) companies. For this reason, there are limitations to the extent with which this risk can be offset.
While early 2014 has seen the pharmaceuticals industry awash with worry over the expiration of patents and fiscal consolidation among developed market governments, a recent surge in M&A interest and activity has breathed life back into the sector once more.
This has the potential to provide support for share prices across big Pharma over the near term while strong and established trends in population growth, ageing and health underpin the longer term outlook.
On a valuation basis, WWH currently trades at a discount to NAV which is close to 4%, but is still fractionally below its targeted level. This leaves the shares vulnerable to under performance in the near term, although the likelihood of this is far from being a certainty.
Risks do exist for investors in the sector and although these can be partially mitigated in some cases, they cannot be fully offset. Due to valuation concerns surrounding certain areas which the trust invests in, it is prone to volatility at present and comes with an above average degree of overall risk attached.
Despite this, the longer term outlook offers a rare opportunity to exploit strong and clearly established global trends, while the cost effective nature of the trust enables investors to achieve a diversified exposure to an attractive growth area while benefiting from professional portfolio management on a full time basis
While the trust has pulled back recently, our overall outlook sees strong support for the shares at and around the 1180.00 pence region. This is as our longer term outlook sees the shares trading toward our price target for the trust of 1500.00 pence.
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