Phoenix Group’s Shift Unveils High Yield Investment in Biotech

At Insider for Closed-End Funds (CEF), discovering high-yielding opportunities amidst market uncertainties is what we specialize in. This time, we spotlight an intriguing situation offering over 12% in dividends, a special case rooted not in the United States, but in the United Kingdom. It all starts with Phoenix Group, a leading British insurance company, which decided to remove a hefty sum of £22 billion (equivalent to $30 billion USD) from the renowned asset managers, Aberdeen Group plc (SLFPY). The motive? To handle this colossal amount internally, an interesting move considering Aberdeen’s previous hold over these assets.

Aberdeen Group might sound familiar to our regular CEF Insider readers, as we previously recommended their funds. A well-regarded entity in the financial world, Aberdeen takes pride in being one of the most impactful managers when it comes to Closed-End Funds (CEFs). However, negative business trends, unfavorable news, and declining favor among analysts have led to Aberdeen’s recent setback, causing Phoenix Group’s withdrawal.

This setback, however, uncovers a silver lining for us—two Aberdeen funds that yield over 12%, namely the Aberdeen Healthcare Investors (HQH) and the Aberdeen Healthcare Opportunities Fund (THQ). These high-yielding funds have a unique background, as Aberdeen only procured them towards the end of October 2023. Prior to this acquisition, Tekla Healthcare Management held ownership, with the operation conducted by a team of medical and financial experts.

Despite their promising features, challenges have hit the healthcare sector, dragging down it notably this year. With RFK Jr.’s appointment as the head of Health and Human Services (HHS), threats of tariffs on imported pharmaceuticals, and increased pressure from the Trump administration for price cuts on medications, the sector witnessed a downturn. However, it appears the market’s pessimism may be somewhat exaggerated.

A look at the discounts to net asset value (NAV – which represents the value of underlying holdings) of THQ and HQH signifies a positive trend. Even though THQ jumped into a premium position before falling back, the markdowns on both these funds have steadily decreased over the past years, suggesting a potential for recovery amidst uncertainty.

Analyzing the NAV performance of each fund reveals a clearer picture. A comparison shows HQH’s total NAV return, which represents the performance of its underlying portfolio coupled with reinvested dividends, outperforming THQ. Combined with HQH’s higher discount rate of 6.4% in comparison to THQ’s 3.7%, it appears that an investment in HQH could be advantageous currently.

Investing in HQH now not only provides you with an attractive 12.7% dividend but also a larger discount. I posit that this discount will continue to decrease, providing an additional upward thrust to the stock. Moreover, any shift towards a more optimistic sentiment in the pharmaceutical sector can quickly close this discount, generating potential gains.

Importantly, investing in HQH poses a lower risk compared to other biotechnology funds. It holds the majority of its position in the major biopharmaceutical company, Amgen (AMGN) and includes investments in renowned establishments such as Vertex Pharmaceuticals (VRTX) and Eli Lilly (LLY) in its top-10 holdings. Thus, a substantial portion of its portfolio comprises well-established stocks, enhancing its risk profile by adding an extra layer of safety.

This balanced risk profile, coupled with its solid holdings, makes a compelling argument for why the discount on HQH should continue to narrow. Given the current circumstances, the dividend strategy at HQH appears to offer an excellent opportunity for risk-averse investors looking to take advantage of this unique situation. This is especially beneficial for those who are focused on making decisions grounded in detailed analyses of key financial ratios and markers within closed-end funds.

Further echoing its longevity and reliability, HQH, through holding stalwarts of the industry, emphasizes its focus on established stocks. This duality of high yields along with a stable net asset position makes HQH a potential choice for investors looking to further expand their portfolios in the biotech and healthcare space.

Consequently, the current situation presents a rare opportunity for prospective investors. The apparent pessimism in the healthcare industry, coupled with HQH’s robust portfolio and strong return on its net asset value, hints at a potential investment opportunity worth exploiting. However, financial prudence suggests such decisions be taken after careful consideration of your risk tolerance and investment goals.

To summarize, HQH offers a unique blend of substantial dividends, a gradually narrowing discount compared to its NAV, and distinctly lower risk compared to other funds. This troika of characteristics makes it a compelling case for careful consideration and potential investment. This headline news thus presents a potentially rewarding opportunity embedded in an unexpected setback.

Although the market changes and economic shifts can be unsettling, they can often lead to lucrative openings for the discerning investor. The recent situation at Aberdeen and Phoenix Group being a case in point. The seeming adversity has unveiled a compelling investment possibility with a double-digit yield in the embattled healthcare space, making HQH worth considering for your portfolio.

While challenges exist, primarily stemming from policy changes and pressures on drug pricing, positive signs such as a narrowing discount to HQH’s NAV and its strong underlying holding performance indicate the possibility of an overcorrection in market pessimism. These elements provide a strong rationale for considering HQH, notwithstanding the larger economic context.

Assuming a recovery in sentiment towards the healthcare and pharmaceutical sectors, with the impressive yield, the narrowing discount, and the stable underlying holdings, HQH seems to offer an attractive entry point into this sector. A careful analysis of the current market scenario, the future outlook for the sector and individual risk appetite will, of course, guide this investment decision.

As an investor, it’s about discovering these seemingly unobvious windows of opportunity. In the rapidly changing landscape of financial markets, dividends, discounts, and calculated risk are keywords that form the lynchpin of effective decision-making. The instance of HQH typifies these elements perfectly, presenting an avenue worth exploring amidst the contending dynamics of the investment world.