BELLEVUE HEALTHCARE TRUST PLC

LEGAL ENTITY IDENTIFIER ('LEI'): 213800HQ3J3H9YF2UI82

HALF-YEARLY REPORT FOR THE SIX MONTHS ENDED 31 MAY 2022

INVESTMENT OBJECTIVE, FINANCIAL INFORMATION, PERFORMANCE SUMMARY AND ALTERNATIVE PERFORMANCE MEASURES

Investment objective

The investment objective of Bellevue Healthcare Trust plc ("the Company") is to provide Shareholders with capital growth and income over the long term, through investment in listed or quoted global healthcare companies. The Company's specific return objectives are: (i) to beat the total return of the MSCI World Healthcare Index ("Index") (in sterling) on a rolling 3 year period (the index total return including dividends reinvested on a net basis); and (ii) to seek to generate a double-digit total shareholder return per annum over a rolling 3 year period.

Financial information

Performance summary

¹ These are Alternative Performance Measures.                  

² Total returns in sterling for the six months period, including dividends reinvested.                         

³ Source: Bloomberg.                             

Alternative performance measures ('APMs')

The financial information and performance summary data highlighted in the footnote to the above tables represent APMs of the Company. Definitions of these APMs together with how these measures have been calculated can be found in the Interim Report.

CHAIRMAN'S STATEMENT

Introduction

We live in serious and sombre times.

In previous statements I have referred to 'truly historic' and 'extraordinary'.

Although the pandemic is easing off, there are still excess deaths and various countries continue to live under restrictions.

However, the invasion of Ukraine by Russia has made the environment profoundly worse - bringing unnecessary death and wanton destruction to the European landmass on a scale unseen since the Balkan Wars in the 1990s.

The consequences of geopolitical upheaval and economic uncertainty

There was an inevitability that the tail-end of the pandemic would see a tapering of fiscal support and monetary accommodation. The invasion has exacerbated a supply side shock impacting both the energy markets, food and energy dense products (e.g. fertilisers, steel, building products) with consequences for consumer disposal income and corporate profit margins.

Occasionally I am invited to lecture university students on valuation. During one such lecture, I pointed out how relatively small changes in discount rates and growth assumptions can have dramatic effects on the presumptive valuation of a company.

For example:  an innocuous sounding move in the growth rate from 3% to 2% and a 'small' increase in the discount rate from 5% to 6% leads to a halving of the valuation of a hypothetical company (using the Gordon Growth Model).

(Our astute readers will, no doubt, observe that 'r-g' (discount rate minus growth rate) doubled in my example from 2% to 4% so a halving of valuation is not unexpected. It is remarkable, nevertheless, how even experienced fund managers have, over the years, been surprised by the results of such a simple model.)

There is an implicit risk in modelling - the assumption that different parameters move independently. In the present environment, we have had an effective increase in discount rates (both the 'risk free rate' and the 'equity risk premium') together with a fall in growth expectations. Furthermore, it is likely that corporates will not be able to pass through all their increases in input costs (energy and wage pressures), precipitating a fall in the margins within many industries (i.e. a small decline in sales expectations leads to a large fall in profit expectations).

In such an environment, it is to be expected that many equity sectors, including healthcare, suffer downward price moves. When there are dramatic changes in the overall climate, there are usually second and third order effects that are not fundamentally driven. For instance, equity and bonds can decline in lockstep during a market downturn, rather than the usual expectation that bonds provide a 'hedge' when equities drop.

Amidst uncertainty and falling asset prices, some investors will withdraw capital from funds. These outflows lead to 'forced' selling of underlying holdings, exacerbating the sell-off. And of course, one needs to also consider the impact of 'market rotation' as some investors switch from yesterday's 'hot sectors' to the 'next big thing'

Although the markets are rational weighing machines in the long term, in the short term 'votes' are often driven by flow. Inevitably, smaller companies suffer disproportionately in such a situation as 'rotation' often also involves moving into larger 'more liquid' names.

There is one 'derivative' order effect that I find hard to explain in any valuation lecture - sentiment. Over the years I have observed that when a company, a sector or market index is going up, sentiment is often shaped by the price performance and the equity premium narrows; when price is falling - sentiment moves in the same direction leading to a self-fulfilling spiral of despair (poor sentiment leading to higher equity premium leading to lower valuation leading to falling prices impacting sentiment….)

Rather than a missive of despondency however, this is a message of hope. All the disruption discussed above leads to pockets of opportunity as stocks are 'dumped' often not due to their intrinsic worth but rather the forces unleashed by geo-politics and macro-economics.

There are a number of characteristics of certain healthcare stocks that make them particularly interesting at the current time. For most healthcare companies, energy is not a significant cost. Labour too is typically a relatively small percentage of the end product sales price. Furthermore, the pandemic has led to a backlog of demand in many specialities.

Finally, the characteristics of healthcare (seldom a discretionary purchase) makes the growth rate (for many, but not all, healthcare companies) less sensitive to macro-economics (growth is often more dependent on achieving FDA approval or roll-out of innovative solutions). An increase in the discount rate can also be considered to be an increase in the long term investor return expectations (as long as the company performs).

The last few years are also likely to drive innovation in healthcare - due to the simple fact that many Western economies are facing shortages of doctors and nurses. In previous missives, I have discussed telemedicine. I suspect going forward there will be multiple innovations across healthcare to improve efficiency - another area of opportunity for the fund.

Performance review

During the period under review (1 December 2021 to 31 May 2022), the Company's share price and NAV decreased 17.5% and 18.7% respectively. Including the final dividend for the financial year ended 2021, the Company's shares delivered a total return of -16.1%. In comparison, the MSCI World Healthcare Index delivered a total return in sterling of +4.5% over the same period.

The period in review saw an elevated level of volatility in the relationship between the share price and the NAV. From inception to the end of fiscal 2021 (November), the shares had mainly traded at a modest premium to NAV, averaging 0.7%. However, the premium began to fall away in late January and the Company spent most of the period at a slight discount. As a consequence, the average discount over fiscal H1 2022 was 0.1%, which obviously impacted the Company's ability to raise additional capital through share issuance.

Every November, we give the opportunity for shareholders to redeem through the Company - thereby hopefully ensuring that the share price and NAV remain closely aligned. Furthermore, we recently reviewed our buyback policy and have established processes to purchase shares should they trade at a consistent and significant discount to NAV.

As usual, I refer readers to the Investment Manager's report and the monthly factsheets for more detailed analysis of the performance. I strongly recommend reading the monthly fund manager missives. The factsheets are available on our website.

Dividends, gearing and issuance

As announced on 3 December 2021, the target dividend for the 2022 financial year is 6.47p. The Directors are pleased to declare an interim dividend for the 2022 financial year of 3.235p per Ordinary share which will again be funded from the Company's distributable reserves. As usual, a scrip dividend option will be available.

As of 31 May 2022, the Company had borrowings totalling £118.9m, equivalent to 11.5% of the gross exposure. As announced on 17 December 2021, the Company renewed and amended its loan facility with Bank of Nova Scotia - extending the duration to December 2024 and increasing the aggregate capacity to $235m. Since the period end, the Company has increased its loan facility to an aggregate value of $280m. At launch, the Company committed to being fully invested, but the Board recognises that the portfolio managers must have some flexibility around market timing, particularly in the current environment, and it has set a soft ceiling of 10% for the maximum net cash position. Maximum gearing remains at 20% of NAV and the Managers still expect the long-term average gearing position to be mid-to-high single-digit percentage.

During the first half of 2022, the Company issued 27.1 million new shares, thus increasing the total number of shares outstanding as at 1 June 2022 to 586.1 million, giving the Company a market capitalisation of £902.5m at the end of the period.

Changes in the period

During the period, the Board resolved to change the Company name from 'BB Healthcare Trust plc' to 'Bellevue Healthcare Trust plc'. The name change was to ensure consistency between the name of the Company and the Investment Manager, Bellevue Asset Management (UK) Limited. The change of Company name was made by the Registrar of Companies on 1 March 2022.

As mentioned in the Annual Report, Professor Justin Stebbing stepped down from the Board on 21 December 2021, the Board thanks Justin for his contribution to the success of the Company.

Outlook

Readers of my letters will be aware of my predilection to use quotes. I was particularly struck by a comment I read from Matthew McConaughey during the pandemic:

'Every red light eventually turns green.'

I cannot say when the traffic lights will change colour. But at some point, market sentiment will improve, equity risk premiums will fall, and flows will stabilise. Meanwhile, it is incumbent upon us to prepare diligently and carefully - whether it be by ensuring the Company has sufficient debt capacity to provide additional firepower when opportunities rise, or the team has interacted with, modelled and analysed sufficient companies to find the 'inevitables': those companies that will grow revenues, margins and profits (or achieve critical milestones for pre-revenue companies) in spite of any ongoing geo-political and macro-economic uncertainties.

On behalf of the Board, I wish you and your families good health and thank you for your continued support of the Company.

Randeep Grewal

Chairman of the Board of Directors

6 July 2022

INVESTMENT MANAGER'S REPORT

Macro environment

Let us begin with some positives. The COVID-19 pandemic is no longer the predominant macro-economic driver of economies, markets and societal behaviour; the pandemic is firmly in the rear-view mirror. However, society continues to wrestle with the supply-side shock and consequential inflation that a rapid recovery in demand has unleashed, especially as the Chinese government clings to unworkable COVID policies that impact the supply side. These negative forces are further compounded by the unprovoked invasion of one of the most economically under-appreciated countries in Europe.

Whilst these travails cast a long shadow over the 'return to normal', we should not ignore the progress: all-cause mortality is back to pre-pandemic norms and most Western countries have returned to full employment. Both of these outcomes seemed unimaginable in the spring of 2020, as we watched the COVID crisis unfolding in Italy. China aside, the re-imposition of lockdowns seems a remote risk and all of this is due to the appliance of bio-science.

With the positives out of the way, we can consider the current situation and outlook. Over the six months to 31 May 2022, the MSCI World Total Return Index declined 4.6% in sterling terms (-9.3% in dollars). There are many cogent reasons why broad equity gauges have fallen: economic and geo-political uncertainty makes future demand harder to predict.

Furthermore, rapidly rising inflation also weighs on demand and potentially erodes corporate profit margins as input costs rise and they may not be able to pass all of this through to consumers in the form of higher prices. In this scenario, it is understandable and rational investors would want to pay a lower price for a share of those future profits than previously.

To the logician (or finance student lectured by our Chairman), a share price encapsulates the net present value of an enterprise's future cashflows adjusted for liabilities; many a tome has extolled the wondrous wisdom of markets and crowds as a value discovery tool. Such comments hold up over long periods of time, during which the participants have the opportunity to assimilate large amounts of data.

Humans though are not dispassionate calculating machines. Amidst fast changing macro conditions, markets become insensible, and liquidity dries up. Price 'discovery' can become a race to the bottom as flighty investors withdraw capital and hedge funds pile on the pressure. This can exacerbate share price movements at the company-specific level far beyond what is implied by any changes to the long-term revenue and profit outlook.

Indeed, we can see this made manifest in the huge intra-sector moves over the period-in-review, belied by the relatively modest change in the dollar value of the Index as a whole: Energy up 44%, Retail -58%, Automotive -25%, Consumer Durables -24% and both Software and Semiconductors -23%. Correlates to economic growth and consumer spending are out, input costs are all the rage.

Any attempt at a quantitative analysis of such moves presumes the starting point for share prices was rational; let us not forget that the MSCI World Index made an all-time high in early January 2022 as Russia began its war against Ukraine. What we are seeing is in an inculcation of uncertainty being discounted in the form of structurally lower return assumptions allied to a long-overdue correction of irrationally high ratings for some technology and media related companies that gained halo status during the pandemic. For companies whose end customers are either the consumer or linked to consumption patterns, all of this makes sense.

Healthcare Performance review

If consumer affordability and consequential demand reduction, allied to rising energy and input prices (predominantly raw materials, labour and manufacturing equipment) is ultimately what bedevils the market, then one would expect defensive (i.e. non-cyclical, non-discretionary) sectors with high gross margins (which indicates lower profit margin sensitivity to price inputs) to outperform during this period and, broadly speaking, this is what we have seen for healthcare; the total return of the MSCI World Healthcare Index was +4.5% in the six months to May 2022 (-0.6% in dollars), outperforming the wider market by 9.1%.

Within the broader healthcare sector, the sub-sector performance dispersion reflects the broad 'risk aversion, theme, with the best performers being Distributors (+42%), Managed Care (+22%) and Diversified Therapeutics (predominantly Large/Mega-Cap Pharma, +17%). Distributors have arguably the lowest revenue cyclicality of any of the sub-sectors and have also benefitted from resolving long-standing opioid litigation overhangs.

Managed Care's performance partly reflects a slower-than-feared normalisation of elective procedure volumes (abetted by the Omicron wave around the New Year) but also its general earnings dependability. There can be some late-cycle earnings slowdown if there are signs of weakening employment trends, but this is not a factor in the US market at the moment. Large-Cap pharma revenue streams are both highly diversified and highly predictable and it is these perceived virtues that investors currently flock to. The fundamentals for the industry around pricing and poor R&D productivity remain as intractable as ever.

On the other side, it was Dental, the most discretionary area, that capped the underperformers (-65%), followed by highly-rated Healthcare Technology (-39%) and Diagnostics (-30%). The Dental sub-sector's biggest virtues are also its biggest vice. Everyone has teeth and almost everyone's teeth come out wonky. We all know too well that, as much as one might try to avoid it, eventually we all end up in the dentist's chair for some treatment or other. However, oral health is rarely a matter of life and death and the work can be finished to varying degrees of visual perfection. One can readily trade down to cheaper treatments and it is this concern that has driven negative investor sentiment.

Healthcare Technology is somewhat discretionary in nature; you do not need to upgrade to a clever pump or continuous glucose monitoring system if you do not wish to. These are very much premium products in the current marketplace. Like Dental, the ratings of these companies got pretty silly in the latter part of the 2021 and a correction was overdue.

Diagnostics is a harder one to rationalise. Coming into 2021, there were some pockets of over-valuation driven by COVID-related excitement about the wider industry, but many of the most egregious over-valuations seemed to have normalised by late 2021. What has followed since has been rather indiscriminate and less obviously fundamental to our minds. It is undeniable that the shift toward 'point of care' diagnostics is an inevitable and necessary part of the ongoing care paradigm transformation and genetics-based molecular diagnostics are an increasingly essential part of population health and preventative healthcare programmes.

Our final observation on the healthcare sector performance would be the continued influence of the 'size factor'; namely small and mid-sized companies have materially underperformed their large and mega-cap brethren. This is partly a function of generalists seeking havens in defensives. In such scenarios, large liquid names are preferred and this helps to drive the dispersion in performance between the two groups.

One could also make arguments for companies in need of short-term equity funding struggling more in a falling market and also for more highly rated stocks to fall further as implied discount rates rise (since a premium rating is the manifestation of a lower implied discount rate or higher terminal growth rate, or both), having a premium rating or needing cash are not directly linked to company size. The key point to our minds is that whilst we are experiencing a divergence in share price behaviour, we are not seeing a commensurate divergence in operating performance; the fundamentals do not support the pattern.

Company Performance review

The Company's strategy is centered around owning companies that are operationally geared into the adoption of a selected group of products, technologies and services that we believe are critical to the evolution of the healthcare delivery paradigm. Because our approach is 'bottom up' and focused around this theme of healthcare change, it was never intended to deliver correlated returns to the wider healthcare sector or the wider equity market.

By virtue of their focused and innovative nature, the holdings in the Company's portfolio tend to be more Small/Mid-cap than Large/Mega-cap. This gives us a size factor profile that is the polar opposite of the MSCI World Healthcare Index. At of 31 May 2022, the Company's portfolio consisted of 15.1% Mega-Cap companies and 8.5% Large-Cap companies. In contrast, the MSCI World Healthcare Index consisted of 76.2% Mega-Cap and 21.7% Large-Cap. Our unchanged approach has left us with a portfolio that has been very much out of favour over much of the past twelve months from a share price development perspective.

Over H1 2022, the Company's cum income net asset value ("NAV") declined 18.7% to 150.41p. The table below highlights the Company's performance during the period in review and since inception in absolute terms and relative to key benchmark indices. Although our strategy is unconstrained, we utilise the MSCI World Healthcare Index in sterling as an internal comparator and external reference point; its parent index is the MSCI World Index and our preferred internal metric is rolling three-year annualised performance, which is also presented:

¹The stated total shareholder return assumes the reinvestment of dividends.

A comparison to last year's interim report, where the Company's share price remained well ahead of the MSCI World Healthcare comparator clearly shows the extent to which our approach has struggled in recent months. The same data though would also highlight the extent of the cumulative outperformance of the strategy over its initial five years.

The chart in the Interim Report, which compares the Large/Mega-Cap dominated US S&P500 Healthcare Index with the Small/Mid-cap focused US Russell 2000 Healthcare Index. Hopefully, this illustrates two points; firstly, that Small/Mid-cap generally delivers better cumulative returns than a more Large/Mega-Cap approach and, secondly, that it is rare for this trend to diverge in a meaningful way for any protracted period. With these points having been made, the stark divergence between the two in recent months clearly stands out.

We firmly agree with Buffet: 'be greedy when others are fearful and be fearful when others are greedy', with the caveat that dip-buying should be on a case-by-case basis when company fundamentals strongly suggest that you are getting a bargain. With this in mind, we have been gradually 'buying the dip' and increasing the gross exposure of the Company by increasing the gearing. The leverage ratio stood at 11.5% as of May 2022, as compared to 4.9% at the end of November 2021 and 1.4% gearing at the end of May 2021.

Environmental, Social and Governance ("ESG") criteria

The field of ESG reporting continues to evolve and we have been keen to lead from the front on this discussion, in terms of tracking metrics relevant to a plurality of investors and in terms of being candid with investors on our opinion of the available data to assess companies on broad ESG measures. As part of our commitment to lead from the front, the Company's Annual Report for the year ended 30 November 2021 included an expansive ESG section and the Board approved an expanded set of ESG exclusion criteria and limits to be tracked on a regular basis, as part of the AIFM's ongoing risk monitoring.

We have been tracking the expanded ESG criteria and limits for two quarters and it is clear that the area "use of embryonic stem cells" is not amenable to being assessed in terms of a measurable threshold. There is simply no way we can measure the impact on a quantitative basis, although two companies confirm that they use such cells in research. Since this area is not amenable to being tracked and is inconsistent with our broader approach, it has been excluded from quantitative monitoring. The Company's Annual Report for the year ended 30 November 2021 (page 37) outlined that: "Whilst the utilisation of embryonic stem cells (gathered historically from aborted foetuses, more commonly today from unwanted IVF embryos that are donated with informed consent or taken from similarly donated umbilical cord material) is undoubtedly controversial, it also has the potential to greatly enhance our understanding of human disease and there are not currently viable alternatives in many cases. There are ethics guidelines (most notably those of the US National Institutes of Health, 2009) and our focus is to ensure that, where such research is undertaken, it is performed in line with these guidelines."

Portfolio evolution

The evolution of the portfolio over the period-in-review is summarised below and reflects the impact of two major considerations; firstly, the post-pandemic normalisation trend within the wider healthcare industry and, secondly, the risks and opportunities created by the accelerating inflation and decelerating economic momentum described previously.

For example, we have been taking advantage of the current weakness to re-establish some exposure to the Dental sector; albeit with different exposures to those we have had previously in order to accommodate the risk of patients trading down from premium options.

We have also added to our holdings in the Diagnostics, Healthcare Technology, Tools and Services holdings on weakness and have utilised Managed Care and Diversified Therapeutics, which have held up well on a relative basis, as a source of funds for these increased holdings elsewhere. The total number of holdings has declined from 32 positions to 29.

*Based on % of gross portfolio

*Based on % of gross portfolio

Full investment portfolio as of 31 May 2022

Paul Major and Brett Darke

Bellevue Asset Management (UK) Ltd

6 July 2022

PORTFOLIO

INTERIM MANAGEMENT REPORT

The Directors are required to provide an Interim Management Report in accordance with the Financial Conduct Authority ("FCA") Disclosure Guidance and Transparency Rules ("DTR"). The Chairman's Statement and the Investment Manager's Report in this half-yearly report provide details of the important events which have occurred during the period and their impact on the financial statements. The following statements on related party transactions, going concern and the Directors' Responsibility Statement, together constitute the Interim Management Report of the Company for the six months ended 31 May 2022. The outlook for the Company for the remaining six months of the year ending 30 November 2022 is discussed in the Chairman's Statement and the Investment Manager's Report.

Principal and emerging risks and uncertainties

A detailed explanation of the principal and emerging risks and uncertainties facing the Company are detailed in the Company's most recent Annual Report for the year ended 30 November 2021, which can be found on the Company's website at www.bellevuehealthcaretrust.com.

Since the publication of the 2021 Annual Report and Accounts on 28 February 2022, there continues to be increased risk levels within the global economy due to the disruptive impact and continued uncertainty caused by the Covid-19 pandemic. The Russian invasion of Ukraine and the subsequent impact on global economies and international relations combined with increasing levels of inflation worldwide and the potential for rising interest rates has raised investment risk. The Board has considered the impact of the continued uncertainty on the Company's investment objectives, portfolio and stakeholders and, continues to monitor the situation closely to both assess and mitigate any impact.

The Board has a dynamic risk assessment programme in place to help the principal and emerging risks in the business and oversee the effectiveness of internal controls and processes.  The principal risks and uncertainties facing the Company are as follows:

•             Market risks, including risks associated with the economy, healthcare companies and sectoral diversification

•             Corporate governance and internal control risks, including business interruption due to Covid-19

•             Regulatory and compliance risks; and

•             Financial risks.

Related party transactions

The Company's Investment Manager is Bellevue Asset Management (UK) Ltd ('Bellevue UK'). In its role as Alternative Investment Fund Manager ('AIFM') of the Company, Bellevue UK carry out portfolio management services and risk management services are delegated to Bellevue Asset Management AG.

Bellevue is considered a related party under the FCA's Listing Rules. Bellevue is entitled to receive management fees payable monthly in arrears calculated at the rate of one-twelfth of 0.95% (excluding VAT) per calendar month of the market capitalisation of the Company. There is no performance fee payable to Bellevue. Details of the Investment Manager's fees during the six months ended 31 May 2022 can be found in Note 11. There have been no changes to the related party transactions that could have a material effect on the financial position or performance of the Company since the year ended 30 November 2021.

Going concern

The Board has a reasonable expectation that the Company has adequate resources to continue in operational existence for at least the following twelve-month period from the date of this report. In reaching this conclusion, the Directors have considered the liquidity of the Company's portfolio of investments as well as its cash position, income and expense flows. The Company's net assets as at 31 May 2022 were £881.5 million (31 May 2021: £973.8 million). As at 31 May 2022, the Company held £987.3 million (31 May 2021: £980.6 million) in quoted investments and had cash of £15.7 million (31 May 2021: £25.7 million). The total expenses (excluding finance costs and taxation) for the six months ended 31 May 2022 were £5.4 million (31 May 2021: £5.1 million).

As part of their assessment, the Board have fully considered and assessed the Company's portfolio of investments, giving careful consideration to the consequences for the Company of continuing uncertainties in the global economy. The Russian invasion of Ukraine and the ongoing Covid-19 pandemic have created significant supply chain disruption, exacerbating inflationary pressures worldwide. A prolonged and deep stock market decline would lead to falling values in the Company's investments or interruptions to cash flow. However, the Company currently has more than sufficient liquidity available to meet any future obligations.

STATEMENT OF DIRECTORS' RESPONSIBILITIES FOR THE HALF-YEARLY REPORT

The Directors confirm to the best of their knowledge that:

·    The condensed set of interim financial statements contained within the Half-yearly report has been prepared in accordance with IAS 34 Interim Financial Reporting.

·    The interim management report includes a fair review of the information required by 4.2.7R and 4.2.8R of the FCA's DTR.

Randeep Grewal

Chairman

6 July 2022

*Audited

There is no other comprehensive income and therefore the '(Loss)/profit for the period/year' is the total comprehensive income for the period.                                                                                                                                                                                                                                 

The total column of the above statement is the statement of comprehensive income of the Company. The supplementary revenue and capital columns, including the earnings per Ordinary Shares, are prepared under guidance from the Association of Investment Companies.                                                                                                                                                                                                                                                                                                 

All revenue and capital items in the above statement derive from continuing operations.                                                                           

The notes are an integral part of these financial statements.