Bellevue Medtech & Services

Global stocks closed slightly higher in September (MSCI World Net Index +0.9%), as did European stocks (Euro Stoxx 50 +0.9%) and Germany’s bellwether index (Dax +2.2%). The global medtech sector (MSCI World Healthcare Equipment & Supplies +0.5%) and the Bellevue Medtech & Services (Lux) Fund (+0.1%) also closed in the green and clearly outperformed the broader healthcare sector tracked by the MSCI World Healthcare Index (-3.8%).

As could be expected, the stocks of innovative, fast-growing companies (which the Medtech & Services Fund is focused on) benefited the most from the US Federal Reserve’s rate cut. By the same token, these circumstances led to last month's weakness in pharmaceuticals and the broader healthcare sector. Shifts in the general investment landscape like this also encourage the investment community to hunt for new, attractive investment ideas. Looking at the big picture, the Medtech & Services Fund stands to reap an outsized benefit from the current market phase.

Medtech stocks in the portfolio that are generating high sales growth, such as Insulet (+13.8%), Straumann (+10.0%), Align Technology (+6.3%), Idexx Laboratories (+4.0%), Cooper (+3.4%) and Boston Scientific (+1.6%) for example, traded higher on the US central bank’s rate cut announcement and other news. Insulet’s management made some positive remarks about the expected number of new patient additions for the second half of 2024.

Shares of portfolio company GE Healthcare (+9.7%) gained on the Chinese government’s the announcement of a fiscal stimulus package.

Zimmer Biomet (-7.1%), Edwards Lifesciences (-6.5%), Dexcom (-4.2%) and Intuitive Surgical (-1.2%) detracted from portfolio performance. Zimmer Biomet disappointed investors when it trimmed its sales forecast for 2024 by about 1% because of problems stemming from a new ERP system. Edwards Lifesciences confirmed its earnings guidance for 2024 but said that earnings per share would likely be markedly lower in 2025 compared to 2024 due to the divestment of its Critical Care business. We assume the company will be able to offset some of the forecast drop in EPS by cutting costs and buying back shares.

The performance of life sciences tools companies Danaher (+2.4%) and Thermo Fisher (-0.3%) was mixed. Thermo Fisher confirmed its long-term sales guidance range of 7% to 9% but added that achieving this growth would be contingent on a full recovery of its end markets, and management made no reference as to the exact time frame here.

HCA Healthcare (+2.0%), the largest US hospital chain, made another positive contribution to the portfolio's relative and absolute performance. Its management team mentioned at various investor conferences that business was going well.

US health insurers traded lower and Elevance (-7.2%), Centene (-5.3%), Cigna (-4.7%), Molina (-2.4%) and UnitedHealth (-1.5%) detracted from portfolio performance. It appears that there was another big increase in surgical procedure volumes at hospitals and ambulatory surgery centers in the third quarter, while the Fed's rate cut portends somewhat returns from health insurers’ fixed-income investments in the medium term. All performance data is in EUR / B shares.

In their talks with investors in March, the executives of many medical technology companies expressed positive views about the course of business during the first quarter and said that they expected fast growth in surgical procedure volumes in 2024. The approval and subsequent launch of relevant new products will continue to bolster sales growth, too. Examples here are Abbott’s TriClip, AVEIR and Libre products, Boston Scientific’s Farapulse PFA system and the new da Vinci 5 surgical robot from Intuitive Surgical. We believe company pricing power in the low single-digit percentage range is still intact. Margins are expected to widen due to the faster-than-average sales growth and further improvements in supply chains.

Hospitals stand to benefit from high patient volumes, higher prices, and only moderately higher labor costs. We expect health insurers to report rising premium income in the wake of solid membership growth and premium rate increases. Persisting high US government bond yields could have an accretive effect on earnings, too. Political risks are still low. We assume that the elections in November will not give either party a solid majority of seats in either chamber.

Unlike in 2023, we are anticipating tailwinds for our investment solution in 2024: Rate cuts by the Fed, attractive valuation levels (valued at a discount despite above-average earnings growth), a general repositioning as investors drop last year's outperformers and move into high-quality stocks, and a meager outlook for global economic growth (which in the past has been good for non-cyclical sectors). All of these factors argue for an investment in the Bellevue Medtech & Services (Lux) Fund.