Healthcare, UK valuations and renewables

We take a look back at the final week of Kepler’s ISA event…by David Kimberley

This week marked the close of our ISA season event and we heard from three managers operating across very different sectors. Commensurately, they touched on a various topics, including the potential for rate cuts and smaller companies to bounce back, income opportunities, and UK energy prices.
 

Bellevue Healthcare

 
To kick things off we had a presentation from Bellevue Healthcare (BBH) manager Paul Major.

Paul, who manages the trust alongside Brett Darke, highlighted the main driver behind the trust’s investments. In short, healthcare systems globally are underfunded and ill set up to handle aging populations. The companies they invest in look to reduce costs, whether it be by developing new technologies or coming up with novel treatments for diseases.

The trust runs a differentiated approach. Firstly, Paul and Brett run a concentrated portfolio, with the number of holdings typically hovering around 30. BBH also has a much larger weighting to small and mid-cap stocks compared to the benchmark.

That was a driver of outperformance for the trust historically. However, rate hikes have impacted valuations for these companies more severely than the wider market. Paul acknowledged this but showed that valuations for their holdings are now particularly attractive, with valuations and market concentration at its most disjointed in decades.

Paul finished off by looking at the US presidential race, arguing that, unlike prior elections, there is now little debate about healthcare, with neither party proposing any drastic changes that would impact US healthcare companies.
 

CT UK Capital & Income Investment

 
Next up we had Julian Cane from CT UK Capital & Income (CTUK).

Julian’s presentation was laser focused on the attractive valuations in the UK and the risks involved in investing in a highly concentrated US market.

CTUK is substantially overweight UK small and mid-caps. Julian highlighted a few key points here, most notably that, over the long-term, valuations do matter and have historically been drivers of superior returns – even if that can take time to play out.

He also noted that the UK small and mid-cap sector is more attractively valued than large cap peers.

Perhaps the most striking point in this regard was an analysis of UK valuations relative to peers and their own history. Most notably, Julian highlighted the fact that UK companies are trading in the bottom 10% range of their own historical average.
 

 

Greencoat UK Wind

 
Our final presentation of the week was from Stephen Lilley, manager of Greencoat UK Wind (UKW).

Stephen started his talk with an overview of how the trust invests and the wider wind energy business model. What was particularly noteworthy here was a breakdown of operational costs, with margins being very high relative to the hydrocarbons business.

A consequence of that, which Stephen then looked at in detail, is that the trust has been able to generate a lot of surplus cash. That has meant consistent dividend growth since IPO in 2013, as well as the ability to reinvest for capital growth. We believe this is a significant point that may have been overlooked by investors who, completely understandably, have focused much more on the income component of UKW in the last decade.

The final key point was an overview of investment activity in 2023. Despite wider macroeconomic headwinds, the trust made several large size investments last year. As a result Stephen believes the trust can generate more than £1bn in excess cash flows, after paying out dividends, over the next five years.
 

Disclaimer

 
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.