The UK is not the only market where the politics of healthcare can be highly febrile. In the US, where there is a presidential election this year, Donald Trump has been desperate to undo health insurance reforms introduced by Barack Obama, his predecessor. Debate in America has also been intense about the high price of prescription drugs and whether the government should intervene to bring down costs for patients.
Against this backdrop sits Worldwide Healthcare Trust, one of an array of ways that investors can take exposure to healthcare and drugs and, in particular, the private sector’s role in their provision. This investment trust was launched in 1995 and its portfolio manager is Orbimed Advisors, a privately owned New York-based group. With a market value of £1.74 billion, Worldwide Healthcare Trust is a constituent of the FTSE 250 and benchmarks its performance against the MSCI World Health Care Index.
Just over 60 per cent of the portfolio’s exposure is to North American companies; in fact, just two of its ten largest holdings are headquartered outside the US. Within healthcare, about a third of the holdings are in pharmaceuticals companies; there are large positions in biotech businesses, equipment suppliers and care providers and a smattering of specialists in life sciences.
As it stands, being reasonably concentrated is not problematic. Market sentiment favours this trust’s stock-picking investment style, and investors are widely operating on the assumption that radical reform of the US healthcare system in the near term is highly unlikely, certainly not before the presidental election.
The popularity of the trust’s approach goes a long way towards explaining its return to form during the latter months of last year after underperforming against its benchmark in the six months to the end of September.
According to the trust’s December fact sheet, its net asset value per share improved by 3.2 per cent last month, against a 0.8 per cent gain in the MSCI World Health Care Index. It also helps to account for the strong recent run in its share price, up just over 29 per cent since late October.
There are other reasons, most importantly the preponderance of larger-ticket pharmaceuticals merger deals. In the past two months, Merck, the US medicines group, has paid $2.7 billion to buy Arqule, the biotech cancer and rare diseases specialist; and Roche, the Swiss-based biotech firm, received approval to buy the gene therapy group Spark Therapeutics, lifting the shares of competing sector players.
Consolidation has been a running theme globally in the healthcare sector as companies take advantage of the benefits of scale and additional research and development firepower. Only a year ago Takeda, the trust’s biggest holding, completed its £46 billion takeover of Shire, its London-listed FTSE 100 rival.
Investment companies such as Worldwide Healthcare Trust also favour the sector because of its long-term dynamics: a gradually ageing global population in increasing need of treatments, the growing role of the private sector in provision, and the greater resources being allocated to the area by governments.
Worldwide Healthcare Trust has beaten its benchmark when assessed over one, three and five years and is clearly a high-calibre sector player. The shares, down 5p, or 0.2 per cent to £32.55 ½, tend as a result to trade at a small premium, as of yesterday about 0.5 per cent, to the underlying value of the assets. The indicative dividend yield of just 0.8 per cent is the only thing getting in the way of an outright “buy”.
ADVICE Hold
WHY High-quality investor in a dynamic market sector but made less attractive by its low yield
XP Power
Put simply, XP Power produces kit that enables companies, as often as not in industry, to plug in their equipment and make it work at different voltages to the one supplied through the local grid. In practice, what it does is considerably more complicated, but, as far as its customers are concerned, the only thing that counts is that the goods are reliable. Given the recent rise in its order book, they seem to be.
XP Power was founded in Pangbourne, Berkshire, in 1988 as a specialist supplier of power convertors. A decade later it began to make its own products, listing on the stock market and beginning an overseas expansion in 2000.
It produces its power controllers, which increasingly feature environmentally aware features such as standby and low-power modes, from a single factory in China and two in Vietnam. It serves four main markets. About 47 per cent of sales are to the industrial sector, where customers include transport groups and the makers of 3D printers. Its work in healthcare, including with imaging and patient monitoring systems, accounts for about 24 per cent of sales and the remainder is divided between semiconductor equipment, at about 18 per cent, and technology, at roughly 11 per cent.
Once secured, a contract tends to last between five and seven years, generating substantial recurring revenues. Less happily, although growth in the healthcare sector tends to be fairly stable, industry, semiconductors and technology are far more cyclical, which has a tendency to hit earnings. After a strong 2018, trading got tougher last year, largely owing to a slowdown in semiconductor equipment manufacturing, before orders rebounded in the fourth quarter.
XP Power has recovered swiftly from the introduction of a new company-wide software system, which sparked a gentle profit warning last month, and prospects going into 2020 are more favourable than this time last year. The shares, down 20p, or 0.5 per cent, at £36.20, change hands for 21.2 times Investec’s forecast earnings and have a prospective dividend yield of 2.5 per cent. After a strong run, it feels as if this share is fairly valued.
ADVICE Avoid
WHY Solid business with growth prospects but the shares are well priced
