Global equity markets continued their steady gains in August, with the healthcare sector keeping pace with the broader market. Looking at the healthcare subsectors in greater detail, biotechnology, life sciences tools and services and healthcare equipment were the best performers, with the distributors, healthcare facilities and managed care lagging. The Company’s NAV increased 3.7% in August, which was modestly ahead of the benchmark (MSCI AC World Daily TR Net Health Care Index) which increased 3.7% for the month.

The implications of a rapidly spreading Delta variant was very much the focus in August, as the market tried to, and is still trying to, assess both its near-term impact and the shape of the downslope. Focussing on the US, the Delta wave does appear to be slowing, especially when using cases and mortality incidence as barometers. Hugely encouraging, yes, but where we go from here is the important, and very difficult, question to answer. While the Delta variant is unlikely to be the last mutation, it is worth noting that any new variants will have to contend with a heavily vaccinated population that should benefit from greater levels of protection.

In terms of healthcare, a rapidly spreading Delta variant, especially amongst the unvaccinated, does have implications for the managed care industry

In terms of healthcare, a rapidly spreading Delta variant, especially amongst the unvaccinated, does have implications for the managed care industry. On the downside, rapidly rising COVID-19 care costs are a consideration for medical loss ratios (MLRs), with the potential positive off-set coming from reduced utilisation as elective procedures, once again, are delayed. How the managed care industry navigates its way through the 3Q21 earnings season will likely depend on where those shifting expectations sit relative to the outlooks that were offered during the second quarter. Delayed elective procedures also have negative implications for medical device companies that have exposure to facilities that are cancelling elective procedures and prioritising COVID-19 patients. By contrast, those medical device companies that have more exposure to ambulatory surgery centres (ASCs) should, in theory, be in a better position to manage their way through the uncertainty. Last but not least, increased testing for Delta and the potential for boosters are important considerations for diagnostics companies, the life sciences tools and services sector, and the companies that manufacture and distribute the vaccines.

Positive relative contributors in August were Alcon, Swedish Orphan Biovitrum and arGEN-X. Alcon produced a strong set of 2Q21 results, exceeding consensus expectations with strength in all divisions. Importantly, Alcon’s US business is predominantly in ASCs which have remained open for business during the Delta wave. Swedish Orphan Biovitrum’s continued positive momentum followed a decent set of 1H21 results in late July. Performance was boosted further in late August following speculation that private equity firm Advent was considering an acquisition (Source: Bloomberg). There were no material updates for arGEN-X during August, with the shares participating in the broader biotech rally.

Negative relative contributors were Amedisys, Centene and Encompass Health. We continue to be constructive on the end markets that Amedisys operates in, namely home health and hospice, but the business is facing some near-term challenges. On the 2Q21 call, the company revealed that high levels of staff turnover have impacted business development within the hospice business. An issue we believe to be transient, the correction in Amedisys’ equity valuation feels over-done. Centene struggled during the period with concerns that the Delta variant will put upwards pressure on the group’s medical costs. There was no material news for Encompass Health, with the market appearing to be frustrated with the lack of material updates at the 2Q21 results. As a reminder, in December 2020 Encompass Health announced that it was exploring strategic alternatives for its home health and hospice business.

Importantly, potential volatility could create opportunities given the healthcare sector will, once again, be the driving force behind generating and delivering much needed solutions to COVID-19-related problems

In terms of portfolio changes, we sold our position in Amgen, Treace Medical Concepts, Arcutis Biotherapeutics and PolyPeptide Group and recycled the proceeds in to Essilor International, Steris, Amerisourcebergen and LivaNova. Essilor International is a global, integrated leader in the eyecare and eyewear industry, with high barriers to entry and an attractive valuation. Steris is a leading provider of infection prevention and services to the healthcare industry. With a resilient top line, the business has a strong track record of margin expansion and earnings growth. Distributor Amerisourcebergen continues to execute, delivering a steady stream of earnings upgrades. Medical device company LivaNova is globally diverse with focussed areas that include cardiovascular and neuromodulation.  We believe the company has a significant potential opportunity ahead with its device to treat depression, something that could dramatically boost the growth profile of the company if successful.

We have seen little in recent weeks to derail our medium-term enthusiasm for the healthcare sector, especially those companies that are sitting slightly higher up the market capitalisation scale. The near term, however, could present challenges as we navigate through an earnings season that will have been impacted by the Delta variant. Importantly, potential volatility could create opportunities given the healthcare sector will, once again, be the driving force behind generating and delivering much needed solutions to COVID-19-related problems.