CI Global Health Sciences Fund

Analysis: As we pointed out in our last review in March 2012, volatility had been increasing which had been causing us some concern. While five months may not be a long enough period on which to judge, we have noticed that volatility appears to have stabilized, which provides us with some level of comfort and reinforces our view on the fund.

Within the fund itself, we haven’t witnessed any major changes to the fund. The manager appears to be doing what he has done for some time, which has been quite successful with the fund, particularly on a risk adjusted basis over the long term.

Looking at healthcare on a total portfolio basis, there are a number of factors which support its inclusion in a well diversified portfolio with a long term time horizon. The first reason is that healthcare is a necessity. As a result, it tends to be a great defensive holding and tends to do better in periods of elevated volatility. It is our belief that there is a significant amount of headline risk in the global economy at the moment which could result in a big uptick in overall market volatility in the next three months or so. Should this play out, healthcare is likely to help dampen overall volatility within the portfolio.

Second is the continuing development of the emerging economies which are bringing healthcare to a much wider market. As this trend continues, demand for healthcare worldwide will continue to grow, increasing revenues and earnings for companies operating in the sector. Thirdly, in North America particularly, there is a big demographic angle to the sector, baby boomers living longer and spending more on not only life saving, but life enhancing drugs and services. Combined, these factors paint a compelling picture for the outlook for healthcare over the medium to long term.

But there are risks. Perhaps the biggest is that if the Republicans win the upcoming November election, they will look into reopening the whole “Obamacare” plan. Should this happen, it is highly likely that we will see a great deal of uncertainty resulting in higher volatility in the sector. How this plays out is still to be determined. Regardless, it won’t be resolved until at least the election, possibly much later.

Within the fund specifically, the manager conducts a top down analysis that helps form a macro view that is used to position the portfolio. This type of investment process and be a double edged sword. For example, if the manager is correct in his forecasts and assumptions about the market, it is likely that the fund will miss a lot of the volatility because the fund is well positioned for such an outcome by either shifting sub sectors or geographic allocations. But a common issue to those who use such a strategy is that the macro picture shows the broader trends, but the markets can sometimes be slow to acknowledge these trends, which can result in performance that lags. That’s what happened to this fund in 2007 and 2008, where he entered a few names too early and paid for it dearly with a 16% drop in 2007 and a 20% drop in 2008. However, in 2009, investors were rewarded with a 28% gain that outpaced the entire healthcare category. Since then, with the exception of a “bump in the road” in the second half of 2011, the fund has done well on an absolute, risk adjusted and relative basis.

Currently, the fund holds 63% in the U.S. and 33% internationally, which is well diversified among a number of countries. At the stock level though, it is fairly concentrated, holding 40 names with the top ten making up just under half of the fund.

Longer term, we still believe in both the macro outlook for healthcare, and the longer term prospects for this fund. We believe in the manager, their style, process and approach. But, we also acknowledge that if we see a repeat of 2007-2008, this fund has the potential to be hit harder than some others in the category, namely TD, which is another one of our favourites.

For those who are concerned about a repeat of 2008, but still want to include some healthcare in their portfolio, we would encourage you to take a look at TD Health Sciences Fund. However, if you have a longer term outlook and are not worried about short term volatility, CI Global Health Sciences remains our favourite in the category.