Market and sector review
Global equity markets ended April slightly up on the previous month, although this modest performance masks significant volatility. Despite the heightened market uncertainty, investors rotated away from defensive stocks into more cyclical parts of the market (especially information technology and communication services), which had been heavily sold off in the preceding months.
The healthcare sector underperformed the broader equity market in April. Within healthcare, managed care, life sciences tools and services and biotechnology faced a difficult month, while healthcare distributors, services, facilities, equipment and pharmaceuticals emerged as the best performing sectors. During April, several companies within our sector reported their Q1 results. A clear trend emerged: companies that were able to quantify the impact of the tariffs and integrate this challenge into their outlook for the year were rewarded by investors. Conversely, companies that failed to address the tariffs directly were punished by the market. We remain confident that our sector is well-positioned to navigate the challenges posed by the tariffs as they stand. Additionally, despite concerns surrounding the appointment of Robert F Kennedy Jr. as head of the Department of Health and Human Services (HHS), the pace of innovation and activity in healthcare remains steady, with the FDA appearing to function as normal.
Fund performance
The Company’s NAV decreased by 1.0% in April, ahead of its benchmark, the MSCI All Country World Daily Net Total Return Health Care Index, which was down 5.1% for the month (both figures in sterling terms).
Positive contributors relative to the benchmark in April were Fresenius SE, Lonza Group and Medley.
There was no news flow during the month for either Fresenius SE or Lonza Group but there is commonality in the strong performance of both as they are each considered defensive and relatively immune from the impact of current and potential future tariffs.
Medley performed well in the month despite there being no news concerning the company, perhaps also helped by a lack of policy and tariffs uncertainty.
Negative relative contributors in the period under review were Vertex Pharmaceuticals, Chugai Pharmaceutical (neither held) and Lundbeck.
Vertex Pharmaceuticals’ performance was likely driven by ongoing enthusiasm for the company’s recently launched pain product Journavx.
We remain confident that our sector is well-positioned to navigate the challenges posed by the tariffs as they stand.
Chugai Pharmaceutical reacted positively to data from Eli Lilly’s oral obesity drug orforglipron as the Japanese company will receive royalties in future sales.
Lundbeck had a challenging month as it is perceived to be heavily exposed to possible tariffs on pharmaceuticals plus there was some follow-through from mixed data from a migraine pipeline asset in late March.
We added a position in Encompass Health in April, a leading provider of inpatient rehabilitation in the US. With inelastic, non-discretionary demand and a defensive payer mix, the management team continues to deliver positive revisions at a relatively attractive valuation. The investment was funded, in part, by an exit from French pharmaceutical company Sanofi.
Outlook
Navigating the new US administration’s early days has been challenging, but the Q1 earnings season has given comfort that those companies with good management teams and value-added products and services can generate positive returns. Uncertainty remains, especially on the tariff front, but there is confidence that the strong fundamentals of the healthcare industry will ultimately prevail.
