Ian Cowie: why this is the biggest theme in my forever fund

Donald Trump wiped billions off big pharmaceutical companies’ stock market valuations by appointing a prominent anti-vaxxer as head of America’s health service. Never mind the macroeconomics, politics or science; here’s how it hit this small investor - and why it might create a wealth-creating opportunity for long-term bargain hunters.

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Healthcare happens to be the biggest theme in my modest portfolio, including several different direct shareholdings and more diversified investment trusts. So it hurt when Trump picked Robert F. Kennedy Junior to be health and human services (HHS) secretary, prompting double-digit slumps in some pharmaceutical share prices.

Trump told him: “Go wild on health. For too long, Americans have been crushed by the industrial food complex and drug companies who have engaged in deception, misinformation and disinformation when it comes to public health.”

Phew! That’s quite a turnaround, even for Trump, who had previously described his new appointee as “the dumbest Kennedy”. Robert Junior has no medical or public health qualifications but frequently criticises “Big Pharma” and is a champion of alternative medicine.

Nothing daunted, he will head up the HHS, which oversees drug, vaccine and food safety, plus medical research, as well as Medicare and Medicaid, America’s state-funded safety nets. Kennedy will also be in charge of the Food and Drug Administration (FDA), where he has hit the ground running by advising employees to: “1. Preserve your records, and 2. Pack your bags.”

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Meanwhile, medium to long-term investors - that is, anyone who can afford to commit risk capital for five years or more - might consider if it is time to get our buying boots on. Shares in the Association of Investment Companies (AIC) “Biotechnology and Healthcare” sector are trading an average of -15% below their net asset value (NAV), although several have delivered total returns of more than 20% over the past year, despite the Trump/Kennedy marmalade-dropper.

For example, RTW Biotech Opportunities Ord (LSE:RTW) is currently priced at a -20% discount to its NAV, despite leading the seven funds in its sector with total returns of 37% over the past year. However, there are no dividends and a bumpy ride or significant volatility is shown by a total return of only 33% over the past five years. RTW lacks a 10-year track record because this £515 million fund was launched in October 2019.

Investors who prefer evidence of sustained medium to long-term performance may favour Polar Capital Glb Healthcare Ord (LSE:PCGH). It leads this sector over five and 10-year periods with total returns of 76% and 162% respectively, albeit followed 27% over the past year. Such good numbers translate into a trivial discount of -2% with an even more insignificant dividend yield of less than 0.6%.

However, the quality of this £463 million fund can be seen in its top 10 underlying holdings. These are led by the American weight-loss wonder drug-maker Eli Lilly and Co (NYSE:LLY), closely followed by its Danish rival Novo Nordisk AS ADR (NYSE:NVO), with other familiar names including Switzerland’s Roche Holding AG (SIX:ROG) and France’s Sanofi SA (EURONEXT:SAN).

Sad to say, I missed both RTW and PCGH because I have been a shareholder in Worldwide Healthcare Ord (LSE:WWH) for more than a decade, having transferred these shares from a paper-based broker in March 2014, when they were trading at the equivalent of £1.35, allowing for a 10-for-one stock split in July last year. They cost £3.27 this week.

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Less happily, WWH lurks in the lower half of its AIC sector over the past year and five years, with returns of 14% and 22% respectively, albeit with a more respectable 119% over the decade. Once again, there is a negligible yield of 0.85% but the shares are priced -11% below their NAV.

To return to where we began, it is by no means certain how long Kennedy will remain in his post, given how rapidly several senior politicians departed during the previous Trump presidency. By contrast, many people are certain to continue to fall ill and seek healthcare solutions to their problems.

So, this sector of the investment trust industry is likely to serve sustained demand in future, which might rise as populations tend to get older and wealthier. That could create opportunities for active investors who want our money to make a difference for the better, by helping to fund pharmaceutical research - such as the coronavirus vaccine that was invented and authorised less than a year after Covid closed the global economy.

Against all that, it is a sign of the strange times we are living through that Kennedy remains a vocal critic of Covid vaccines, although it is not clear whether Trump still favours household bleach as a preventative. Here and now, healthcare investment trusts cannot guarantee healthy returns but could prescribe a way for long-term investors to do well by doing good.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Eli Lilly (LLY), Novo-Nordisk (NOVO) and Worldwide Healthcare (WWH) as part of a globally diversified portfolio of investment trusts and other shares.