Bellevue AI Health

A growing number of datapoints in July indicated that the US economy was slowing down: Inflation ticked lower again while the jobs market showed initial signs of a downturn. Bond yields retreated (10-year US Treasury -0.4% to 4.0%), as did the US dollar (DXY US Dollar Index -1.7%).

These developments led stock markets around the world to higher ground, as reflected in the monthly returns of major large-cap indexes such as the MSCI World (+1.8%) and the S&P 500 (+1.2%). The Nasdaq 100 (-1.6%), conversely, was pressured by profit-taking and the greater exposure to household consumption among some of the companies in this index.

As could be expected, the broad MSCI World Healthcare index (+3.3%) outperformed the total market amid this general environment marked by economic uncertainty. The Bellevue AI Health Fund (+2.3%) also ended the month with a clearly positive return but was unable to beat its benchmark.

Biopharma (59.2% weighting at the end of the month) contributed 1.0% to the fund's absolute performance and had a neutral impact on its relative performance. Otsuka (+22.5%), Daiichi Sankyo (+18.9%), Roche (+16.9%) and Amgen (+6.4%) made positive performance contributions, while Eli Lilly (-11.2%), Novo Nordisk (-8.6%) and Merck (-8.6%) were performance detractors. Roche and Amgen have become the closest competitors to Eli Lilly and Novo Nordisk in the market for weight loss medications. Promising data (high weight loss), monthly instead of weekly injections and the possibility of oral administration have caught investors’ attention. Roche presented better-than-expected second-quarter results too and raised its guidance for 2024 as a whole.

Medtech stocks (23.8%) contributed 0.7% to the fund’s absolute performance and -0.3% to its relative performance. While Thermo Fisher (+10.9%), Danaher (+10.9%) and GE Healthcare (+8.7%) made positive contributions, Dexcom (-40.2%) and Boston Scientific (-4.1%) hurt performance in July. Life sciences tools companies Thermo Fisher (+10.0%) and Danaher (9.9%) reported very good results. The long phase of bioprocessing inventory destocking that held back their sales growth seems to have come to an end. Tempus AI (+23.7%) performed very well after its modest debut in June when the company went public. GE Healthcare has agreed to buy Intelligent Ultrasound's clinical AI software business. Intelligent Ultrasound is a leading provider of integrated AI-based image analysis tools that make ultrasound machines smarter and more efficient. Dexcom management appears to have made some mistakes in realigning and reorganizing its sales organization, but these should be remedied by the end of the year.

Healthcare services (11.9%) delivered a positive absolute performance contribution of 1.0% and a relative contribution of -0.3%. United Health (+13.1%) and IQVIA (+16.5%) had a positive impact on fund performance. Prices of their stocks moved higher thanks to the second-quarter earnings announcements and the changing dynamics of the US presidential election campaign after Kamala Harris became the Democratic Party’s presidential candidate. Her popularity had a positive impact on US health insurers focused on Medicaid and on hospital operators, both areas that are underweighted in the fund.

The fund's tech exposure (4.4%), which includes tech companies from both the healthcare and information technology industries, contributed -0.2% to the fund's absolute and relative performance. Veeva (+5.8%) and Waystar (+7.0% - IPO from previous month) made positive contributions to fund performance, while Qualcomm (-9.2%), Microsoft (-6.4%), Nvidia (-5.3%) and Oracle (-1.0%) weighed on performance. Microsoft released a solid set of second-quarter results. AI-related revenue already accounted for 8 percentage points of its growth with Azure cloud infrastructure. Capacity bottlenecks prevented Microsoft from growing even faster in this area. The scale of investments in AI and the corresponding return profiles have become a topic of growing discussion among investors. All performance data in USD / B shares.

The rapid development of generative artificial intelligence (GenAI) is ushering in an unprecedented technology-driven transformation that ranks right next to other key milestones such as the Internet, cloud computing and the smartphone. GenAI is creating tremendous opportunities for businesses and investors, especially in the health sector. According to a number of studies, the health sector will be one of the industries that will benefit the most from the deployment of GenAI. This forecast is mainly based on the considerable potential for efficiency gains in healthcare systems, on the large, readily available amounts of data in healthcare systems, and on the considerable financial resources available for healthcare needs.

Already today medications are being developed more quickly and with better rates of success, for example, new diagnostic and treatment methods are producing better clinical outcomes, and GenAI is helping medical professionals make better and more informed decisions. We focus on healthcare companies that have made GenAI a core element of their business strategy and that are investing substantial resources in this technology to gain a lasting competitive advantage and achieve superior value growth. The technology risk here is more calculable than in other industries because healthcare is such a heavily regulated industry.