HQH: Future Rate Cuts Will Help Fund's Performance

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Trevor Williams/DigitalVision via Getty Images Overview The healthcare sector's (XLV) performance continues to lag behind that of the S&P 500 (SPY). This can be attributed to a variety of things, such...

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This can be attributed to a variety of things, such...</p>\n\n<a href=\"https://seekingalpha.com/article/4692155-hqh-future-rate-cuts-will-help-funds-performance\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>HQH: Future Rate Cuts Will Help Fund's Performance</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nHQH: Future Rate Cuts Will Help Fund's Performance\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-11 16:55 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4692155-hqh-future-rate-cuts-will-help-funds-performance><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Trevor Williams/DigitalVision via Getty Images Overview The healthcare sector's (XLV) performance continues to lag behind that of the S&P 500 (SPY). This can be attributed to a variety of things, such...</p>\n\n<a href=\"https://seekingalpha.com/article/4692155-hqh-future-rate-cuts-will-help-funds-performance\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0795875086.SGD","symbol_name":"JPMorgan Investment Funds - Global Income A (div) SGD","start_time":0,"source_url":"https://seekingalpha.com/article/4692155-hqh-future-rate-cuts-will-help-funds-performance","article_id":"2434828982","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1635107530/image_1635107530.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2434828982","pubTimestamp":1715417702,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Trevor Williams/DigitalVision via Getty Images Overview The healthcare sector's (XLV) performance continues to lag behind that of the S&P 500 (SPY). This can be attributed to a variety of things, such","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"LU0795875086.SGD":"JPMorgan Investment Funds - Global Income A (div) SGD","BK4585":"ETF&股票定投概念","LU0466842654.USD":"HSBC ISLAMIC GLOBAL EQUITY INDEX \"A\" (USD) ACC","SSO":"两倍做多标普500ETF","SPY":"标普500ETF",".SPX":"S&P 500 Index","LU2236285917.USD":"ALLIANZ GLOBAL INCOME \"AMG\" (USD) INC","OEX":"标普100","LU0949170772.SGD":"Blackrock Global Equity Income A6 SGD-H","IVV":"标普500指数ETF","LU1814569148.SGD":"WELLINGTON GLOBAL QUALITY GROWTH \"D\" (SGDHDG) ACC","LU1291159041.SGD":"CPR Invest - Global Silver Age A2 Acc SGD-H","SPY.AU":"SPDR® S&P 500® ETF Trust","VRTX":"福泰制药","LU1267930490.SGD":"TEMPLETON GLOBAL EQUITY INCOME \"AS\" (SGD) INC A","LLY":"礼来","LU2602419157.SGD":"HSBC ISLAMIC GLOBAL EQUITY INDEX \"AC\" (SGD) ACC","IE00BKVL7J92.USD":"Legg Mason ClearBridge - US Equity Sustainability Leaders A Acc USD","LU0738911758.USD":"Blackrock Global Equity Income A6 USD","ABBV":"艾伯维公司","BK4588":"碎股","AZN":"阿斯利康","UPRO":"三倍做多标普500ETF","THQ":"Tekla Healthcare Opportunies Fund Shares of Beneficial Interest","LU1829250122.USD":"高盛欧洲核心股票组合Acc","XLV":"健康照护类股ETF-SPDR","LU0889565916.HKD":"FRANKLIN BIOTECHNOLOGY DISCOVERY \"A\" (HKD) ACC","LU1093756168.USD":"FRANKLIN K2 ALTERNATIVE STRATEGIES \"A\" (USD) ACC","BIIB":"渤健公司","LU0234570918.USD":"高盛全球核心股票组合Acc Close","BK4139":"生物科技","GILD":"吉利德科学","LU0912757837.SGD":"JPMorgan Investment Funds - Global Income A (mth) SGD-H","LU0456855351.SGD":"JPMorgan Funds - Global Equity A (acc) SGD","ILMN":"Illumina","LU0053666078.USD":"摩根大通基金-美国股票A（离岸）美元","AMGN":"安进","OEF":"标普100指数ETF-iShares","SPXU":"三倍做空标普500ETF","THW":"Tekla World Healthcare Fund Shares of Beneficial Interest","IE00B2B36J28.USD":"JANUS HENDERSON GLOBAL LIFE SCIENCES \"I1\" (USD) INC","REGN":"再生元制药公司","LU0234572021.USD":"高盛美国核心股票组合Acc","BMRN":"拜玛林制药","SDS":"两倍做空标普500ETF","HQH":"HQH基金","IE00B7SZLL34.SGD":"Legg Mason ClearBridge - Value A Acc SGD-H","LU0661504455.SGD":"Blackrock Global Equity Income A5 SGD-H","SH":"标普500反向ETF"},"translate_title":"HQH：未来降息将有助于基金的表现","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ABBV":1,"XLV":1,"VRTX":1,"THW":1,"THQ":1,"SPY.AU":1,"SPY":1,"REGN":1,"LLY":1,"ILMN":1,"HQH":1,"AMGN":1,"GILD":1,"AZN":1,"BIIB":1,"BMRN":1,"SPXU":0.6,"OEF":0.6,"OEX":0.6,"SDS":0.6,"SH":0.6,"SSO":0.6,"UPRO":0.6,".SPX":0.6,"ESmain":0.6,"IVV":0.6},"content_text":"Trevor Williams/DigitalVision via Getty Images Overview The healthcare sector's (XLV) performance continues to lag behind that of the S&P 500 (SPY). This can be attributed to a variety of things, such as a high interest rate slowing the growth and development of new drugs and technologies within the space, regulatory uncertainty, drug patent expires, and even the decoupling of the dependence on Covid related illnesses to drive demand. While each healthcare, pharma, or biotech company may have their own distant differences, a Closed End Fund like abrdn Healthcare Investors (NYSE:HQH) gives us a diverse exposure that allows the ability to capture upside movements while mitigating downside risks. Data by YCharts However, we can see that HQH's performance falls behind the pack in total return when compared against peer funds like abrdn Healthcare Opportunities Fund (THQ) or abrdn World Healthcare Fund (THW). Taking a look at the total return chart, the price has historically traded on par with these peer funds prior to the decline starting in 2022. I believe that this may present an opportunity to capture the upside potential as the fund can eventually close with gap of performance over time, especially now that the dividend sits much higher. When I previously covered HQH, the price sat at an attractive discount to NAV of over 17%. While the price still sits at a discount to NAV, I believe we have additional catalysts involved that make HQH a Buy. For some context, HQH operates as a closed end fund that invests in stocks of companies operating within the healthcare sector. What differentiates HQH from the peer funds, THQ and THW, is that HQH has the largest focus on biotech companies and because of this, the fund is much more vulnerable to a higher interest rate environment. I believe this is why we've seen such a widening of the gap of performance between the peer funds. Interest rates started rapidly rising in Q1 of 2022 and coincidentally is when we saw the widening underperformance begin. Biotech companies typically rely on debt financing to fund different growth initiatives, research and development, or fund day to day operations. In an environment where the rates are elevated, there are a lot less companies willing to borrow capital as the rate of interest payments could carry too much of a burden. Despite this, I believe we may see the price and total return potential increase as rates eventually come back down and medical spend increases. However, one major gripe I have with the fund is the reliance on return of capital to fund the distribution, despite recently increasing that distribution by a large 26.3%. Portfolio Updates HQH's portfolio remains diverse across the biotech, pharma, and healthcare sectors. Biotech takes the lead at 62% of the portfolio being exposed to this sub sector. While this makes HQH a strong bet of the recovery of biotech, it also presents a vulnerability as this creates a higher sector concentration risk opposed to a fund that was more even split between sub sectors. The top ten holdings listed below account for 45.11% of the fund's total value.   Ticker Company Percentage Difference (%)   (REGN) Regeneron Pharmaceuticals 8.51% +0.86%   (VRTX) Vertex Pharmaceuticals 8.18% +0.24%   (AMGN) Amgen 7.39% -0.06%   (GILD) Gilead 5.65% -0.16%   (AZN) AstraZeneca 3.62% +0.09%   (BIIB) Biogen 3.08% -0.72%   (LLY) Eli Lilly 2.67% N/A   (ABBV) AbbVie 2.11% +0.27%   (ILMN) Illumina 1.97% +0.21%   (BMRN) BioMarin Pharm 1.94% +0.32%   Click to enlarge For reference, I've included a column to show the difference between in holding weight from my initial coverage of HQH back in November of 2023. The fund has an active management fee of 0.99% of net assets, with other fees amounting to 0.18%. There are a total number of 129 holdings within the fund, and the current portfolio turnover rate sits at 43%. Taking a brief look at the updated holdings, here are some standout performers:  Regeneron Pharma: up over 190% over a 5-year period and recently announced $3B in share buybacks. Vertex Pharma: Net income rose by 56% in the latest Q1 earnings. Amgen: Beats earnings expectations and increased revenue by 22% YoY.  Catalysts I've briefly mentioned the vulnerability to interest rates, but to further drive this point, take a look at the price of HQH in relation to the shift in the federal funds rate. We can see that when rates were cut to near zero in 2020, the price of all 3 of these abrdn funds rose as valuations were increased due to access to cheaper capital. However, as soon as rates started to rise in 2022, we saw prices fall and stabilize around their current ranges. Data by YCharts While I don't fully expect interest rates to be cut this year, this is okay as an elevated rate gives us the opportunity to continue accumulating. There is no incentive for the Fed to cut rates as inflation remains high and the job market remains strong with low unemployment numbers. In addition, consumer spending still remains strong. However, I believe that when rates are cut, possibly next year, we'll see an influx of cash hit the healthcare market as debt would now be cheaper to acquire, and new drug innovations can continue to take place. Additionally, people are living longer than ever before, with the average life expectancy now hitting 79.25 years old. As a result, I anticipate spending on healthcare to continue increasing as we live longer and try to combat old age with better nutrition, medicine, and wellness care. Referencing research conducted by AMA Research, nearly $4.5T was spent on healthcare in 2022 and the largest portions of that spend were allocated towards hospital care, physician services, prescription drugs, and other personal healthcare. AMA Research This spending increases are driven by longevity but also rising drug costs. According to a different study conducted by PwC, the median cost of newly marketed drugs rose to $222,000 while overall medical costs are estimated to rise by 7% throughout 2024. This translates to an estimated cost of $160 in annual expenses coming out of consumer pockets. Therefore, I believe that HQH is a great way to gain exposure to the cost of healthcare costs while simultaneously building an income stream from a sector very likely will be the source of your biggest expense at some point in your life. Dividend & Valuation As interest rates rose, we've seen the NAV (net asset value) of HQH decrease since the peak in 2021. The fund aims to make distributions at the rate of 2% of the fund's net assets. In 2021, the NAV per share was $25.47, but we've since seen that decrease to $18.84 per share at the end of 2023. A decreasing NAV over long periods of time can indicate that HQH is now earnings enough income to meaningfully growth their net assets, which could result in the deterioration of NAV and total returns. As a result, we can see that net investment income in combination with net realized gains has not been sufficient enough to cover the full distribution since 2021. For example, 2023's NII showed a loss of ($0.02) per share, while net realized gains amounted to $1.11 per share. This combined total of $1.09 per share was not enough to fully cover the distribution, which amounted to $1.61 per share. The same can be said for 2022 and this has contributed to the large decrease in NAV. HQH 2023 Annual Report The dividend was raised by a massive 26.3% back in February. After the raise, the latest quarterly distribution currently sits at $0.48 per share, which brings the starting yield up to 9.8%. I question whether or not the raise in distribution was a bit too soon when taking the unfavorable conditions in consideration. We can see from the latest Section 19a report, 90% of the distribution was funded from return of capital. HQH Section19a Form I plan on reviewing the next annual report that should release at the end of September or beginning of October to analyze how well the distribution was covered for 2024. I do stay cautious here as the distribution was recently raised by 26.3%, but it still looks like NII is unable to cover the distribution on its own. However, for those who have already held HQH for a long period of time, the income produced from the fund has doubled over the last decade. Portfolio Visualizer Using Portfolio Visualizer, we can see how the growth in dividend income with an original $10,000 investment. This calculation assumes no additional capital was ever invested. However, it does assume that dividends were reinvested. Starting from 2013, your income would've essentially doubled from $1,030 up to $2,253 in annual income for 2023. Therefore, HQH has definitely achieved its goal of generating a high level of income for shareholders. The price still trades at an attractive discount to NAV of 13.28%. When I initially covered this CEF, the discount sat a bit more attractive at a discount of over 17%. Since then, the total return has been over 17%, outpacing that of the S&P 500 by a slight 1% margin. For reference, the price still trades below its pre-pandemic level of $20 per share. With the previously mentioned catalysts, I believe that the price can recover back to this level once market conditions become more favorable for biotech. CEF Data Lower interest rates should drive greater demand within the sector and fuel increased valuations as capital expenditure can increase. Therefore, I think the current price range gives us a great opportunity to continue accumulating. Taking a look at the discount history above, we can see that the current discount to NAV level sits at one of the most attractive points ever over the last decade. Risk HQH has already shown us that it remains highly vulnerable to the rise in interest rates. There is a chance that rate cuts get further delayed, and we are stuck in an environment where the federal funds rate remains elevated alongside inflation. This would likely further deteriorate HQH's NAV and share price, so if you do not think rates will be cut within the next 6 to 12-month period, you may be able to snag a better entry. Data by YCharts In addition, the high yield offered by HQH is likely more appealing to investors that are nearing or at retirement age. If you do not need the income generated by a high yielding closed end fund such as this, you are likely doing yourself a disservice by putting unnecessary tax consequences on your portfolio as well as underperforming the general healthcare index. We can see how the total return of the XLV is much superior to that of HQH over the last decade. Section 19a Form Lastly, the continued use of return of capital will be destructive to the NAV if things don't improve. I understand that ROC may have an appeal in terms of tax treatment, but in this case, it is harming the future growth of the fund. Taking a look at the estimated distribution amount for YTD of the current fiscal year, we can see ROC making up 90% of the distribution. Takeaway  I believe that HQH gap of underperformance to its peer funds has the potential to close, as increased medical spending and an increased longevity amongst the population will both serve as catalysts within the healthcare space. However, while the valuation sits at an attractive discount to NAV level, the current distribution has not been covered by the fund's NII or realized gains. The majority of the distribution has been funded by return of capital, which remains destructive over a long period of time in combination with unfavorable market conditions around the high-interest rates. While we can seize an opportunity on the recovery of the sector, we must also be aware of the risks in case the recovery takes longer than anticipated.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.5","shortVersion":"4.22.5","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2434828982"}