Bellevue Medtech & Services

After making good gains in the previous month, world equities (MSCI World Net Index -0.5%) fell back a bit in December, but European stocks (Euro Stoxx 50 +1.9%) and Germany’s benchmark index (Dax +1.4%) both showed positive returns. The broad healthcare sector as measured by the MSCI World Healthcare Net (-4.1%) closed sharply lower.

The shocking murder of UnitedHealth executive Brian Thompson in New York sparked widespread controversy over business practices in the health insurance industry and the profit-driven system of healthcare in the US in general. In addition, President-elect Trump’s statements that his administration was going to "knock out the middleman” in the healthcare system showed uncertainty among investors. His comments sent the shares of major US health insurers into deeply negative territory (S&P Managed Care Index -12.8%). True to form, the Bellevue Medtech & Services Fund (-2.8%) was more resilient than the broad healthcare sector and closed the month in line with its benchmark, the global medical technology market (MSCI World Healthcare Equipment & Supplies Net -2.5%).

The Bellevue Medtech & Services Fund delivered a pleasing full-year performance of 15.3%, which also marked a return to pre-pandemic performance levels. Its performance was significantly better than the broad healthcare sector’s performance (+8.1%). This mainly reflects fear-driven selling of pharma and life sciences tools stocks late in the year after vaccine skeptic Robert F. Kennedy Jr. was nominated as the next health secretary and in the wake of the UnitedHealth tragedy. The fund also outperformed the all-share Swiss index (SPI +4.8%) and the European stock market (Euro Stoxx 50 +11.9%), while Germany's blue-chip index (Dax +18.8%) generated a slightly better return and the global stock market (MSCI World Net Index +26.7%) a significantly better return, this due to mega tech stocks in the US.    

In December, large-cap medtech names such as Edwards Lifesciences (+6.0%), Becton Dickinson (+4.9%), EssilorLuxottica (+2.5%) and Boston Scientific (+0.6%) made positive contributions to performance. Edwards surprised investors when it issued better-than-expected sales guidance for 2025 at its investor day. In addition, medtech companies are profiting from the sustained sharp upturn in surgical procedure volumes. Meanwhile Stryker (-6.0%), Abbott (-2.8%) and Intuitive Surgical (-1.7%) declined on profit-taking.

Small-cap medical technology companies such as Glaukos (+6.6%), Dexcom (+1.8%), Insulet (-0.1%) and Penumbra (-0.7%) provided better-than-average returns. Dexcom benefited from new treatment guidelines from the American Diabetes Association (ADA), which now recommends continuous glucose monitors for adults with type 2 diabetes who don’t require insulin. More than 25 million people in the United States fall into this category. Cooper Cos (-10.1%), which published quarterly results that fell short of investor expectations, and Procept BioRobotics (-14.0%), which got hit by profit-taking, had a negative impact on fund performance.

The stock prices of US health insurers had a negative impact of -0.4% on overall fund performance for the reasons mentioned above. Cigna (-16.2%) and UnitedHealth (-15.0%) declined, while Centene (+3.1%) had a positive impact on fund performance. 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.