Market and sector review

Global equity markets ended 2023 with strong returns in December. In a continuation from the previous month, traditionally riskier areas of the market such as economically exposed sectors (real estate; consumer discretionary; industrials) and smaller-cap stocks outperformed their more defensive counterparts. The healthcare sector once again lagged the broader market given the risk-on attitude of investors. On a subsector basis, managed care, healthcare distributors and pharmaceuticals posted negative or muted returns, while healthcare supplies, healthcare services, healthcare information technology and biotechnology were up substantially.

The Company’s NAV was up 5.9% in December, ahead of the benchmark (MSCI All Country World Daily Net Total Return Health Care Index) which was up +3.6% for the month, in sterling terms.

The state of the US economy dominated the macroeconomic debate in December, much like the rest of the year. The consensus view at the start of 2023 was that the US would face a recession in the near term as the Federal Reserve tightened economic conditions at a precipitous rate, with most fearing a hard landing would be the only way to tame rampant inflation. As the year progressed, the US economy proved resilient on the back of unemployment close to record lows, solid consumer spending and confidence, inflation falling rapidly from the vertiginous heights experienced in 2022 and GDP quarterly growth often ahead of expectations. Despite all the positive data, the spectre of a higher-for-longer interest rate environment worried investors as this would keep valuations of riskier assets under downward pressure. December marked a clear shift in this narrative, with Fed Chair Jerome Powell declaring the rate hike cycle over and even hinting that 2024 could see rate cuts. Understandably, this change in tone from the Federal Reserve caused equities and bonds to spike in the last month of the year.

The latter stages of 2023 saw a recovery in high growth, high terminal value parts of the healthcare sector, a recovery that coincided with a rapid decline in US Treasury yields.Fund activity

The top three contributors on a relative basis in December were Cytokinetics, UnitedHealth Group* and Zealand Pharma. Cytokinetics reported very positive results from its phase three trial for an asset to treat obstructive hypertrophic cardiomyopathy. The data was much better than anticipated, causing the stock to rally significantly on the day of the announcement. There was no meaningful news concerning UnitedHealth Group. The weakness of the stock could perhaps be attributed to investors’ more risk-on attitude during the month but also by bond prices rising rapidly, a negative for managed care organisations which tend to have large fixed income investment portfolios that benefit from higher yields. Zealand Pharma held a very upbeat R&D event focussed on its obesity programmes, increasing investors’ understanding and appreciation of the commercial opportunity the company’s rich pipeline could offer.

Negative contributors on a relative basis during the period were argenx, Merck and AptarGroup. The weakness in argenx was caused by disappointing clinical development news as the company’s drug Vyvgart failed to meet the primary endpoint for its phase three trial for moderate to severe pemphigus vulgaris (a rare autoimmune skin disorder). Despite this indication expansion being a fairly small commercial opportunity, this was a second clinical trial failure for the drug in a matter of months. Similarly, Merck had negative phase three results for its key pipeline asset evobrutinib in relapsing multiple sclerosis, removing a leg of growth for the company’s healthcare segment and sending the stock down over 13% on the day. Finally, despite there being no significant news flow concerning AptarGroup, the stock was weak, perhaps due to profit-taking after a strong run in the year and reduced euphoria for second-derivative GLP-1 beneficiaries.

During the period, we added positions in Insulet and ConvaTec Group. Insulet is a medical device company that specialises in the manufacture and commercialisation of insulin pumps. Having derated heavily during the second half of 2023, we took the depressed valuation as an opportunity to invest in a management team that is executing well in a structural growth market with a strong product offering. ConvaTec Group is a UK-based healthcare supplies company focussing on continence, ostomy, wound care and infusion care. The stock struggled in the third quarter of 2023 on what we believe are unwarranted concerns over its infusion care business, a business that some investors believe could be affected by the parabolic ascension of GLP-1 drugs. Given the attractive valuation, a new product cycle and an improved track record for management’s ability to deliver on growth and margin expansion, we believed the stock offered a compelling entry point. The new additions were funded by exiting R1 RCM, Molina Healthcare, Merck and LivaNova.


The latter stages of 2023 saw a recovery in high growth, high terminal value parts of the healthcare sector, a recovery that coincided with a rapid decline in US Treasury yields. The recovery in the biotechnology subsector was also boosted by a number of deals and some positive clinical data. Looking ahead in 2024, continued enthusiasm is fuelled by a healthcare innovation engine that is driving new product cycles, a strong demand backdrop and attractive valuations for the potential growth on offer. On a relative basis, 2023 was a challenging year for healthcare investments but we are optimistic that 2024 could see a reversal in fortunes.

*not held