The first month of the year saw global equity markets edge higher, supported by two interrelated themes: a continuation of the reflation trade and growing investment in physical infrastructure required to support the rapid expansion of artificial intelligence. Both dynamics were clearly visible in January. Deep cyclical sectors such as energy, industrials and materials performed strongly, alongside emerging markets, smaller capitalisation and value stocks, and commodities, particularly precious and industrial metals. At the same time, the US dollar weakened and interest rates moved higher. Against this backdrop, it was unsurprising that the healthcare sector lagged the broader market. Within healthcare, distributors, biotechnology, and pharmaceuticals generated positive returns, while healthcare IT, managed care, and equipment were weaker. The Company’s NAV declined by -0.4% in January, ahead of the benchmark (MSCI AC World Daily Net TR Health Care Index) which declined -0.8% for the month.
Early in the month, we attended the JP Morgan Global Healthcare Conference in San Francisco, where we met with a wide range of companies across the sector. Investor sentiment was markedly improved compared with a year ago, when healthcare was largely out of favour, primarily due to policy uncertainty. Following the announcement of drug pricing agreements between the US administration and several large pharmaceutical companies, policy concerns featured less prominently in discussions, with attention shifting back towards companies’ fundamentals. We left the conference with renewed confidence in the long-term strength of the healthcare industry, underpinned by persistent demand for solutions addressing unmet medical needs, a robust innovation pipeline, and a pickup in merger and acquisition activity across both biotechnology and medical devices. These factors continue to support our constructive outlook for the sector.
That said, it would be premature to conclude that policy risk has fully receded. A timely reminder of the sector’s sensitivity to political developments came with the release of the Medicare Advantage Advance Notice. This outlined the proposed reimbursement rates for managed care organisations operating Medicare Advantage programmes in the following year. For 2027, the Centers for Medicare and Medicaid Services (CMS) recommended an effectively flat rate increase. This was materially below the market’s expectations for a mid-single-digit increase, which had reflected higher utilisation trends, rising medical costs, and assumptions of a more accommodative stance from CMS under a Republican administration. As a result, managed care stocks with significant Medicare Advantage exposure sold off sharply. In addition, no legislative progress was made on extending Affordable Care Act exchange subsidies, which expired at the start of the year, raising the risk that a meaningful portion of the US population could lose health insurance coverage.
The key pillars of our constructive stance remain intact. Namely new product stories, ongoing demand for products and services plus expectations for ongoing industry consolidation given the fragmentation, strength of balance sheets and the need to bolster internal pipelines.
Positive relative contributors relative to the benchmark in January were UnitedHealth Group, Abbott Laboratories and Penumbra. The Fund had no exposure to UnitedHealth Group, a stock that reacted negatively to the disappointing payment rates from the US government for Medicare Advantage plans in 2027, as explained above. The Fund also had no exposure to Abbott Laboratories which struggled following a weak set of Q4’25 results, with the US diabetes miss one of the biggest concerns. Penumbra’s strong performance was driven by robust Q4’25 earnings results in conjunction with a bid from Boston Scientific, valuing the company at over $14.5bn.
Negative relative contributors in the period under review were Johnson & Johnson, iRhythm Technologies and Gilead Sciences. The Fund had no exposure to Johnson & Johnson, a stock that continues to perform strongly as confidence in the sustainability of the pharma franchise grows, alongside solid performances within the medical device unit. iRhythm Technologies delivered a strong set of Q4’25 results and in-line 2026 guidance but also announced another delay to the potential US approval of its next generation monitoring device, Zio MCT. An over-reaction perhaps, but also a dent in the market’s confidence as it thinks about growth in 2027 and beyond. Similarly to Johnson & Johnson, we had no holding in Gilead Sciences, a stock whose near and medium-term revenue visibility has been improving on the back of its HIV and oncology franchises.
We increased exposure to the life sciences tools & services subsector via new positions in Agilent Technologies, Icon and Merck KGaA. Agilent has some exposure to some of the more cyclical parts of the market such as chemicals and energy, Merck KGaA has exposure to the field of bioprocessing which appears to be on a path to sustainable recovery. Icon is a clinical research organisation which should benefit from a buoyant biotech funding environment. We also added a position in biotechnology with Argenx, Medincell and Corvus Pharmaceuticals. Argenx was bought following the recent pullback, a decision driven by ongoing commercial execution and a deep pipeline. We are also excited about the long-term potential of Medincell’s long-acting injectable technology and about Corvus Pharmaceuticals pipeline, with multiple clinical-stage programmes in immune diseases and cancers. The positions were funded by sales in DexCom, Lonza Group, Regeneron Pharmaceuticals, Sandoz Group, Penumbra and West Pharmaceutical Sevices.
The Q4’25 earnings season is creating a lot of volatility, and the weak US$ is adding an earnings momentum complication for European based companies. However, the key pillars of our constructive stance remain intact. Namely new product stories, ongoing demand for products and services plus expectations for ongoing industry consolidation given the fragmentation, strength of balance sheets and the need to bolster internal pipelines.
