A Word On The Markets
Global markets moved higher in the third quarter of 2016 amid continued low interest rates and diminishing concern about Britain’s vote to leave the European Union. Recovering from their sharp pullback following Britain’s “Brexit” vote in late June 2016, stocks advanced for much of the summer. An upturn in oil prices also provided a boost to global stocks.
The Bank of England surprised markets in August with a stronger‑than‑expected policy response to Brexit by cutting rates by 25 basis points to 0.25% and announcing that it would purchase 60 billion pounds of U.K. gilts over the next six months and 10 billion pounds of corporate bonds over the next 18 months. BOE governor Mark Carney said that the central bank could cut rates again, if necessary.
Markets became temporarily unsettled in mid‑September when Federal Reserve Bank of Boston President Eric Rosengren said there is a reasonable case for the Fed to gradually raise rates. This quickly reversed when the Fed remained on hold at its late‑ September meeting.
The Fed’s decision at its September meeting to leave rates unchanged coupled with low global interest rates helped drive most stock markets higher during the three‑month period. Signs of strength in China’s beleaguered economy, including improved business and consumer confidence, also cheered investors.
As global equities advanced during the quarter (MSCI World up 4.87%), driven by strong returns within cyclical sectors such as information technology, financials, and materials, concerns about the healthcare sector were evident, as the MSCI World Healthcare1 sector finished relatively flat for the quarter, up 0.07%.
For the third quarter of 2016, the Worldwide Health Sciences Fund Class A Shares outperformed the MSCI World Healthcare Index (the Index), returning 0.18% at NAV, vs. 0.07% for the Index.
-- Within the global healthcare sector, lifescience tools and services was the strongest performer during the quarter, up 13.8%, followed by biotechnology, which was up 6.7%. Biotech rebounded in the third quarter after trailing for much of the year, after a strong sell off in the first quarter.
-- Pharmaceuticals, the largest Index weight at nearly 50% of the MSCI World Healthcare Index, was down ‑3.4% during the quarter, as continued worries about health care pricing weigh upon the sector.
-- For the Fund, industry allocation within the health care sector was a strong driver to relative returns, while stock selection was negative overall.
-- The Fund’s overweight to the United States was additive to performance, as the U.S. outperformed much of the world during the quarter. Additionally, European health care stocks were generally down during the quarter, and the Fund’s underweight to the region was a contributor to returns.
Notable positive contribution in the quarter was primarily driven by industry allocation.
-- The Fund’s overweight to biotechnology, as well as strong stock selection within the group, was the largest contributor to performance.
-- An underweight to pharmaceuticals was additive for the month, as the sub‑sector was the worst performing group within health care for the three month period. Returns were also aided by strong stock selection within health care equipment and supplies.
-- Top stock contributors for the quarter were Biogen, Inc.(NASDAQ:BIIB) and BioMarin Pharmaceuticals within the biotechnology sector. Biogen announced better than expected second quarter revenues and EPS. BioMarin rose after the July release of positive data for one of its blood disorder drugs.
-- Illumina Inc. (NASDAQ:ILMN), one of the leaders in lifescience tools, was a top contributor to performance during the quarter as the company beat earnings estimates.
-- Additional contributors included Medivation, Inc., which was acquired by Pfizer during the quarter, and Wright Medical Group, an equipment and supplies company that posted solid 2Q16 earnings.
Stock selection was the primary detractor to performance versus the index in the quarter, largely within the pharma space.
-- ONO Pharmaceuticals (TSE:4528), a Japanese pharma company, was the largest negative contributor. Ono’s partner, Bristol Myers, announced a negative trial result in its lung cancer program. Bristol Myers was also a negative contributor.
-- Novo Nordisk (NYSE:NVO), a pharmaceutical company based in Denmark, was down on concerns about drug pricing concerns, specifically within the U.S.
-- Underweights to Merck & Co, and Amgen, two large index names, as well as an overweight to McKesson Corp., were negative for the quarter.
Investment Outlook And Fund Positioning
All eyes will be on the Fed in coming months, as investors gauge the likelihood of an interest hike. Investors will also be keeping very close tabs on the U.S. presidential election.
Hillary Clinton’s platform on health care is an extension of the current administration’s. Donald Trump supports a repeal of the Affordable Care Act and more interstate competition among private health plans. Current aggregated poll data indicate that the House of Representatives will remain under Republican control while the Senate is too close to call. A split Congress would lead to legislative gridlock (i.e., more of the same). It will be important to watch the next president’s use of executive order; doing so could enable the president to circumvent Congress with respect to the health care agenda.
We continue to use the current uncertainty in the health care sector to our advantage in managing the Fund. The spread in valuation between biotech and the S&P 500 is at the largest discount since 2000 and we remain focused on strong businesses with innovative pipelines at reasonable prices.
The views expressed in this report are those of portfolio manager(s) and are current only through the date stated at the top of this page. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. This commentary may contain statements that are not historical facts, referred to as “forward looking statements”. The Fund’s actual future results may differ significantly from those stated in any forward‑looking statement, depending on factors such as changes in securities or financial markets or general economic conditions, the volume of sales and purchases of Fund shares, the continuation of investment advisory, administrative and service contracts, and other risks discussed from time to time in the Fund’s filings with the Securities and Exchange Commission.