Market and sector review
February saw global equity markets edge higher, demonstrating similar characteristics to those seen in January. Defensive sectors such as staples and utilities performed well, as did cyclicals such as energy, industrial and materials. This was an unusual set of circumstances driven in part by the market’s desire to shun big technology stocks and invest in areas that will either benefit from investment in artificial intelligence (AI) infrastructure or will be immune from potential disruption from AI.
Against this backdrop, the healthcare sector outperformed the broader market with the most defensive subsectors, namely facilities, distributors and pharmaceuticals, leading the way. In contrast, healthcare technology and life sciences tools and services were heavily sold off, driven by fears AI could prove to be disruptive.
February 2026 will forever be remembered as the month that the potential power of AI, both as a constructive and as a disruptive force, impacted broad swathes of the market outside the immediate arenas of technology and software. The commoditisation of code and the growing role of AI as an alternative solution to managing and accessing data has created a significant overhang for industries that rely on application software. The same can be said of information services as new co-working tools from OpenAI and Anthropic appear increasingly competitive. Firm conclusions have yet to be drawn as to how AI will impact our personal and working lives, but there is little doubt that 2026 will be a year of enormous change.
Switching gears to healthcare, AI appeared to be a key driver behind subsector performance in the month. The pharmaceuticals sector continues to perform well given its defensive characteristics, but it is also a sector that is highly unlikely to be disintermediated by AI given its physical assets. Further, there is a school of thought that the biopharmaceuticals industry could benefit from AI in areas such as drug discovery, regulatory filings, supply chain and manufacturing optimisation, and the acceleration of new product launches via dynamic targeting and real-time marketing content. Distributors is another subsector that could leverage AI and automation to drive efficiencies and operating margin expansion and also to improve and simplify customer care. Last but not least, healthcare facilities could use AI to support better interactions with payers and vendors and also to improve scheduling, staffing and the running of operating rooms.
On a less positive note, the two worst performing subsectors in February were healthcare technology and life sciences tools and services, both of which have AI as an overhang on the long-term sustainability of their business models. In the case of technology, the commoditisation of code has created an overhang for companies that offer customer relationship management (CRM) services and/or a commercial solution. In the case of contract research organisations (CROs) there is a yet-to-be-proven concern that AI could mean less outsourcing and reduced demand for CRO products and services. Unfortunately, the potential upside from more clinical trials coming into the funnel and AI-driven efficiencies that could be a tailwind for the CRO industry’s margins are being heavily discounted, to the point of being ignored.
Fund performance
The Company’s net asset value (NAV) declined by -0.1% in February compared to 5.0% for its benchmark, the MSCI All Country World Daily Health Care Net Total Return Index (figures in sterling terms).
We have not lost confidence in the near and medium-term outlook for the healthcare sector as we continue to see exciting new product cycles and ongoing demand for healthcare products and services
Positive contributors relative to the benchmark were Roivant Sciences, Chugai Pharmaceutical and Boston Scientific.
The key driver behind Roivant Sciences’ strong performance was positive Phase II data for a key pipeline asset, brepocitinib, for the treatment of cutaneous sarcoidosis (an inflammatory skin disease affecting c40,000 adults in the US).
Chugai Pharmaceutical appears to be responding to positive revisions in its ‘Royalties and other’ accounting line, which is being driven by increasing expectations for the royalty stream the company will receive from Eli Lilly’s oral obesity drug orforglipron.
The Fund had no exposure to Boston Scientific, a company that continues to struggle in the face of concerns that one of the company’s key growth drivers, atrial fibrillation, is starting to face competition and slow down.
Negative relative contributors were ICON, NovoNordisk and Guardant Health.
ICON, a CRO, was adversely impacted by two things in February: first, concern that AI could prove to be disruptive for the CRO industry, and second, the company announced it is undergoing an investigation into accounting practices.
NovoNordisk continues to disappoint. Not only was the company’s financial guidance for 2026 disappointing, but the company disclosed lacklustre results for its late-stage pipeline asset for the treatment of obesity CagriSema.
Despite announcing a decent set of 2025 financial results and 2026 guidance that offers plenty of room for upside, Guardant Health struggled with the primary driver appearing to be a rotation out of high-growth, high-value stocks into more defensive areas of the market.
We initiated positions in Bridgebio Pharma and Innovent Biologics.
Bridgebio Pharma has a relatively derisked pipeline with three key assets: Infigra for the treatment of achondroplasia (a genetic disease that causes short-limbed dwarfism), BBP-418 indicated for muscular dystrophy (a genetic disease that causes muscle weakness and wasting) and encaleret for the treatment of hypocalcemia (abnormally low calcium levels). The company also has a number of commercialised assets for the treatment of rare diseases.
Innovent Biologics is a leading Chinese biopharmaceuticals company with strong commercial presence, a deep pipeline and high-value partnerships.
We exited our position in IQVIA Holdings.
Outlook
February was incredibly challenging for the Fund’s relative performance, driven by stock-specific issues (NovoNordisk), AI-driven fears for the CRO industry (ICON and IQVIA Holdings) and a rotation out of high-growth, high-value diagnostics companies (Guardant Health and iRhythm Technologies). Importantly, however, we have not lost confidence in the near and medium-term outlook for the healthcare sector as we continue to see exciting new product cycles and ongoing demand for healthcare products and services. Further, the recent rotation and volatility is creating a dislocation from fundamentals, a dislocation that could yield some exciting opportunities.
