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27. Bull, Bear & Beyond – Polar Capital Global Healthcare Trust: executive interview
5 Plays1 year ago
Polar Capital Global Healthcare Trust (PCGH) is a London-listed investment trust focused on the global healthcare sector. It is benchmarked against the MSCI All Country World Index and the MSCI World Health Care Index. The investment team was established in 2007 and includes fund managers who previously held senior roles in the healthcare industry before managing money in the sector. The trust takes a high-conviction approach, aiming to generate capital growth by investing in a diversified portfolio of worldwide healthcare companies. PCGH has a relatively conservative investment profile (c 25–60 stocks) made up of global, high-quality healthcare giants (c 80% of the portfolio) and innovative small-cap names (c 20% of the portfolio).
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About ‘Bull, Bear & Beyond’
Bull, Bear & Beyond': features candid conversations with senior executives and from our own team of experts from across industries, exploring strategy, innovation, and the opportunities shaping their markets and 60-second pieces are a compressed summary of content designed to convey our message in a single, easily shareable hit.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
Original interview published on 03/12/2024 and reposted as a podcast
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Transcript
Introduction to Edison TV and Host
00:00:08
Speaker
Hello everyone and welcome to Edison TV. My name is Aaron Atkar. I'm an analyst in the healthcare and investment trust teams here at Edison.
Overview of Polar Capital Global Healthcare Trust
00:00:16
Speaker
Today we're speaking with Polar Capital Global Healthcare care Trust, a London listed investment company focused on the global healthcare care sector.
00:00:23
Speaker
Welcome Jamie. Good afternoon, how are you? Good,
History and Strategic Shift of the Trust
00:00:26
Speaker
good. Great. So to start with, can you give us some background on Polar Capital Global Healthcare Trust and its investment strategy for those of viewers who are less familiar with the trust?
00:00:35
Speaker
Yes, of course. I mean, I'll go back to the original guys, which is 2010. And that was launched by Gareth Powell, the current head of the healthcare care team. um And really, the the view back then was they felt, the team felt that the pharmaceuticals industry was It was sold, it was attractively valued, and it would re-rate and also had a yield component. And and and indeed, that turned out to be richly prescient. But then in the summer of 2017, the board took the view that actually that focused on income really was um detracting from the ability of the management team to perform. And so the mandate changed to one of growth.
00:01:13
Speaker
And that's where we are as we sit here today. so So that's kind
Investment Structure of the Trust
00:01:17
Speaker
of like the background. In terms of the structure, um The way we look at it is really in two sleeves. One is called the innovation portfolio, one growth. but that That can be a wee bit misleading. What I mean by that is that all the innovation portfolio means is that at the time of investment, the company has tell a market cap below $5 billion, dollars and then the growth portfolio is above that.
00:01:40
Speaker
so So don't be confused by that because obviously large companies can innovate as well. um And we can have up to 20% of the assets in the innovation portfolio and the balance will come in the growth portfolio. And there we can go all the way up to the mega caps in terms of structure. ah twenty five Typically 25 to 60 positions, so very concentrated and actively managed. And in terms of the objective, what we're trying to achieve is can we, ah you know, obtain kind of capital growth from a portfolio of global healthcare companies? ah And hopefully that's really what we're trying to achieve.
Trends and Drivers in Healthcare
00:02:12
Speaker
Excellent. So um what do you believe are the key trends slash drivers in the healthcare sector at the moment? And how is Polar Capital positioned to take advantage of them?
00:02:21
Speaker
Yeah, great question, Aaron. um So I'll focus on long-term and more shorter term, if I may. So if you if you look at a lot of the literature we've written, we've focused really on six durable growth themes. One is called delivery disruption, this idea that can we ah treat patients not in a hospital in a lower-cost setting? We believe the answer to base. Yes.
00:02:43
Speaker
Another theme is innovation. We think the healthcare industry is extremely innovative. ah Consolidation is one. It's highly fragmented. I think companies will use use their balance sheets to to pursue mergers and acquisitions. And we also look at emerging markets, prevention and outsourcing. So they're kind of like the long-term themes. But sometimes we'll adopt a short-term lens and and we'll look at what might be more pertinent in the next 12 to 18 months. So, for example, it might be elevated levels of utilisation.
00:03:09
Speaker
ah It might be access and affordability, and it also might be this idea that does the healthcare industry have the capacity to overlay artificial intelligence and machine learning on top of existing technologies? So they're the kind of the themes in terms of how we try and get exposure to that. So relative to our benchmark, we have an 08 biotechnology. Hopefully that reflects our technology.
00:03:33
Speaker
constructive stance and innovation. We're also exposed to facilities. They're simply hospitals who take patients through.
Impact of AI in Healthcare
00:03:39
Speaker
And on the outsourcing theme, you know, we do have exposure to life sciences and tools, but that's not necessarily your traditional manufacture of capital equipment and shibbles. That's more on the contract manufacturing side.
00:03:51
Speaker
So circling back to one of the themes you just pulled out, and how significant an impact on the healthcare sector do you expect from the growing role of AI in areas such as drug development itself, as well as diagnosis and say medical imaging?
00:04:05
Speaker
Yeah, it's a very topical subject, of course. um And we kind of separate into two themes. So one is where are we seeing and potentially seeing a positive impact today? And we think the overlay of AI, machine learning, or existing technologies can help things like diagnoses, ah things like colonoscopies, ultrasounds. you know Can you improve the quality of the outcome? Can you help the physicians spot things they can't with a naked eye?
00:04:33
Speaker
We're potentially seeing it also putting options into the system and making employees more efficient. know Can we grow our top line without necessarily investing heavily in full-time employees?
00:04:43
Speaker
And so we're starting to see that kind of creep into the industry as well. When it comes to drug development, we're a bit more circumspect. um Clearly, there's some truly exciting things going on. But ultimately, we're a heavily regulated industry.
00:04:57
Speaker
ah Patient safety is paramount. And so we don't think we're quite at the point yet where it introduces such phenomenal efficiency that's going to make a huge difference. We still have to design the studies, design the trials, design the drugs, and ultimately run the long-term studies to prove those
US Election Impact on Global Healthcare
00:05:13
Speaker
outcomes. So I think when it comes to R&D productivity, maybe wee bit further around to the next decade, but in terms of today, we are starting to see some impact in certain areas.
00:05:23
Speaker
So turning now to current events, ah what's your view of the impacts on the recent US presidential election results on the healthcare care sector globally? Yeah, so if we if we go back a few months when we were coming into the election, we were of the mind that there were really two areas of focus for the market. One was access to care and one was drug pricing.
00:05:44
Speaker
So let's focus on access to care first. And the view was if we had a ah Trump administration, And there was potentially two impacts. One would be, would he reduce the subsidies that available to low-income Americans?
00:05:58
Speaker
um And that's really affected two parts of our industry called Medicaid, which is low-income Americans, and the exchanges that was brought in by Abawa in 2010. So that would be a perceived negative for those insurance companies that operate in that field, but also maybe for the facilities um due to the fact there was just less insured people.
00:06:18
Speaker
On the positive side of access to care, we felt that the Trump administration might be more constructive on the rate environment for Medicare Advantage. And that really is products for the over 65s or the US seniors.
00:06:29
Speaker
um And indeed, when he first came in, we started to see that play out. On the drug pricing side, it's just a lot more opaque. i mean, we haven't heard much really from him heading into the election. ah we took a view that perhaps with the inflation introduction, sorry, the inflation reduction act, which was August, 2022, leave, um, would he potentially slow that down or would he go in into the negotiations with the government and try and get greater discounts? We just simply had no idea.
00:06:59
Speaker
and so things were really kind of playing out as we thought they might, but then obviously the kind of left field announcement really for the entire industry was when He nominated Robert um F.K. Jr. to be the potential head of the HHS, which is the Department of Health and Human Services.
00:07:16
Speaker
And that really created a bit of uncertainty simply because some of his public statements around things like vaccines, fluoride in water, the association between HIV and AIDS. And so that did create a bit of uncertainty.
00:07:30
Speaker
um But there's a few things to point out, I think. Firstly, it's a nomination. That's what we still have at the beginning of next year. Secondly, we've had you know some nominations to the FDA, the Food and Drug Administration, the CDC, um and the Surgery General. And they're all um qualified doctors. And so we're hoping there's a bit more balance that's going be brought into the debate. But I think the bottom line is this, is that we have seen this before.
00:07:57
Speaker
We have seen this uncertainty before. ah And I know it's only history, so caveat to apply, but we just think the uncertainty is a really interesting opportunity for but for for healthcare investors.
Valuations and Future Outlook of Healthcare
00:08:10
Speaker
Excellent. So um our final question today, um what do you see in terms of valuations in the sector at present? And then just following on from that, what's your outlook for the sector as we moved into 2025?
00:08:22
Speaker
Yeah, thank you. So if you look at the US, um I'm reflecting on one year forward PE data. You know, it's a roughly around a 20% discount. I just looked at that this morning.
00:08:33
Speaker
And that compares to a historic modest premium. And so that is one interesting observation. if you look at the global data, it's also at a discount, maybe not as pronounced, but certainly relative to history, that looks attractive. So I think valuations are on your side. In terms of our stance, ETF outflows have been very aggressive. it' too We think an interesting contrarian call.
00:08:56
Speaker
The fundamentals the industry are strong, particularly on the innovation side. The demand for products and services continues to be high. And so after a period of challenging relative performance for the industry, we're hoping, particularly if you look at the potential earnings growth next year, that 2025 could be a lot more interesting.
00:09:14
Speaker
Fantastic. Well, Jamie, thank you very much for your insights. I look forward to following the progress of the company and indeed the sector. Thanks again, everyone, for your time and have a good day.