Market and sector review
Global equity markets experienced a sharp downturn in March, following an already weak February. Much like the previous month, investors remained ostensibly risk-off. Though the tape was overall orderly and there was no sign of real capitulation or panic, equity outflows accelerated, with cyclical sectors or stocks at richer valuations being hit the hardest while safe havens like gold and credit were some of the biggest beneficiaries of the rotation.
Given its defensive qualities, the healthcare sector outperformed the broader equity market in March. Trading within healthcare reflected the same broader risk-off attitude: healthcare services and distributors performed strongly, together with managed care and facilities, while healthcare information technology, supplies, equipment and life sciences tools and services had a more challenging month.
With a series of policy proclamations from the White House, geopolitical and economic uncertainty was the key issue in the minds of investors in the US as well as globally. The new US administration has escalated its stance on imposing (or threatening to impose) tariffs on many of its trading partners, with the European Union, Japan and the UK becoming targets alongside China, Mexico and Canada. The full extent and longevity of these tariffs remain unclear, making it difficult to predict their long-term impact on the global economy.
Despite the Federal Reserve chair brushing off any tariff-induced inflation as “transitory”, many expect that such measures will indeed stoke inflation at a time when GDP growth is decelerating alongside weakening consumer sentiment and spending. Add to these dynamics the cuts in the federal workforce and the freeze of some grants directed by the newly created Department of Government Efficiency (DOGE), and the US labour market, which has so far been fairly resilient, now feels on shaky ground. Trump’s bet is that the ‘pain’ will be temporary and future tax cuts and deregulation will reverse the course of a US economy that seems to be heading towards a recession. Only time will tell if that is a winning bet.
Fund performance
The Company’s NAV decreased by 7% in March, behind its benchmark, the MSCI All Country World Daily Net Total Return Health Care Index, which was down 4.6% for the month.
Positive contributors relative to the benchmark in March were UnitedHealth Group, Fresenius and Stevanato Group.
There was no thesis-changing news for either UnitedHealth Group or Fresenius during the period, although they are considered to be defensive and not overly exposed to some of the broader macro issues such as tariffs and DOGE-related cost savings. Stevanato Group disclosed a solid set of 4Q24 financial results in early March and, more importantly, announced 2025 guidance that bracketed consensus expectations.
Negative relative contributors in the month were Novo Nordisk, Vaxcyte and Zealand Pharma.
Novo Nordisk continues to struggle, with the market questioning two things: (1) the company’s ability to recapture market share from cheaper, compounded versions of its key diabetes and obesity drugs in the US; and (2) the ability of its products and pipeline to go toe-to-toe with the competition. As a reminder, compounding pharmacies and compounders exist to fulfil unmet medical needs by providing patients with access to customised medications that are not commercially available, such as specific dosages and formulations.
Vaxcyte, a US biotechnology company that focuses on vaccines, disclosed disappointing Phase II results for its infant vaccine targeting pneumococcal disease. The program has not been discontinued, but the market is concerned about the lack of near-term catalysts and the company’s ability to compete in the infant market.
We firmly believe that high-quality, rigorous science will prevail in the long run; we just have to be patient and battle through the volatility.
March was a frustrating month for Zealand Pharma, with the Danish biotechnology company signing an attractive licensing deal with Roche Holding for its key pipeline asset, petrelintide, for the treatment of obesity. With a $1,650m upfront payment, $1,225m in development milestones and up to $2,400m in sales milestones, the deal is transformative for Zealand Pharma. Unfortunately, the value of the deal quickly faded with the company caught up in the general biotechnology downdraft.
We started positions in AstraZeneca and Novo Nordisk, both mega-cap pharmaceutical companies trading at attractive valuations and with potential catalysts that could drive near-term multiple expansion and medium-term revenue momentum. The catalysts are in therapeutic areas such as Huntington’s disease, hypertension and oncology. The investments were funded by sales in Acadia Healthcare, DexCom and Roche Holding.
Outlook
March, much like February, was another challenging month. Tariff concerns aside, the Trump administration, or perhaps more accurately the DOGE, is implementing drastic staff cuts at the Health and Human Services Department (HHS) with the move being part of Secretary Robert F Kennedy Jr's strategy to shrink and reshape the nation's health agencies. Sadly, the cuts are extensive, from the Food and Drug Administration and the National Institutes of Health to the Centers for Disease Control and Prevention.
First and foremost, the cuts are incredibly unsettling and disruptive for the thousands of employees at risk – that should not be overlooked. However, the cuts are also creating anxiety for the companies and subsectors that could be directly exposed to the disruption, namely biotechnology and pharmaceuticals interacting with the FDA, companies developing vaccines and life sciences and tools companies that provide consumables, equipment and services into government agencies. We firmly believe that high-quality, rigorous science will prevail in the long run; we just have to be patient and battle through the volatility.
