A Word On The Markets
Performance of the global equity markets in the second quarter of 2016 can be summarized in one word ”‘ Brexit. The U.K. referendum that resulted in Britain’s decision to leave the European Union sent the markets into a June swoon after two very non”‘volatile months in April and May.
Brexit polls created the initial volatility and optimism late in the quarter, but the final vote cemented an unexpected outcome. Extreme currency fluctuations across the globe added to the volatility, with notable moves in the sterling, euro, yen and U.S. dollar.
Despite the roil, global markets were still able to post modest gains in the quarter. The MSCI World Index1 ended the period up 1.2% (total return), an improvement compared to the first quarter, in which that index was negative.
Brexit catalyzed an investor stampede to a “risk”‘off” strategy, buying defensive names and selling uncertainty. As a result, health care stocks performed well during the period. The MSCI World Health Care Index returned 5.6% in the quarter, compared to broader indices, which trailed. Commensurately, large”‘cap pharmaceutical stocks were up 7.9% in the period (as measured by the NYSE Arca Pharmaceutical Index). However, biotechnology stocks sold off in response to Brexit. The NASDAQ Biotech Index was particularly volatile, with a greater than ”‘15% move (peak to trough) within the quarter, reaching a multiyear low and closing down 1.1%.
Performance Summary
For the second quarter of 2016, the Fund’s return was 3.7% for Class A shares at net asset value, as compared to the MSCI World Health Care Index return of 5.6%.
-- Positive returns in the quarter came from a variety of sources, but most notable was the medical device space, in which both positioning and stock picking generated absolute and relative positive performance.
-- Underperformance relative to the Index was due to sector positioning in large”‘cap pharmaceuticals (underweight) and stock picking in large”‘cap biotechnology stocks, partially offset by stock picking in specialty cap biotech stocks.
-- Negative alpha generation was primarily due to positioning in large”‘cap pharmaceutical stocks. Our underweight positioning did not capture the large rebound that occurred in the period, although large”‘cap pharma was a positive absolute contributor.
-- Stock picking in large”‘cap biotechnology also contributed to underperformance, due to unexpected negative catalysts.
Quarterly Attribution Analysis
Contributors
The largest contributors to performance were mostly large”‘cap stocks from the medical device and pharmaceutical sectors.
-- The combination of positive first”‘quarter earnings results and increased investor confidence in future growth drove the outperformance of Boston Scientific (BSX, Financial) shares.
-- Investor enthusiasm continued to build for the sales potential of Opdivo, Bristol”‘Myers Squibb (BMY, Financial)’s blockbuster cancer drug. The stock reached a 52”‘week high in the quarter.
-- Robotic procedure volumes, an improving gross margin profile and diminished investor concern over competitive robotic system launches all led to strong share price performance for surgical robot maker Intuitive Surgical, Inc. (ISRG, Financial).
-- Shares in Abbvie Inc. (ABBV, Financial) traded higher in the quarter, as investors recognized the stock as a value play with important catalysts looming in the second half of 2016.
-- Shares in medical spine company NuVasive, Inc. (NUVA, Financial) outperformed due to solid earnings results, favorable acquisitions and improving market dynamics.
Detractors
Detractors in the quarter stemmed from a mix of idiosyncratic negative catalysts, while underweight positioning in some notable large”‘caps created some alpha headwinds.
-- Shares in Allergan PLC (AGN, Financial) gapped lower in the quarter after its planned merger with Pfizer (PFE, Financial) fell through due to prohibitive federal regulatory changes.
-- Alexion Pharmaceuticals, Inc. (ALXN, Financial) fell more than 15% after the company’s investigational compound for the treatment of myasthenia gravis failed in late stage clinical trials.
-- Shares of Illumina Inc. (ILMN, Financial) gapped almost 25% lower after the company preannounced lower”‘than”‘expected fir Illumina Inc st”‘quarter revenue estimates due to lower sales of genome sequencers.
-- Shares of biotech giant, Biogen Inc. (BIIB, Financial) fell after the company reported a failed trial in multiple sclerosis with the novel agent opicinumab, commonly referred to as “anti”‘LINGO.”
-- Negative alpha came from stocks with notable strength and size in the Index, but which were underweighted in the Fund, including JNJ, Pfizer, Medtronic, Novartis and Merck.
About Risk: Fund performance is sensitive to stock market volatility. Because the Fund investments may be concentrated in a particular industry, the Fund share value may fluctuate more than that of a less concentrated fund. Investments in foreign instruments or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical or other conditions. Smaller companies are generally subject to greater price fluctuations, limited liquidity, higher transaction costs and higher investment risk than larger, established companies. No Fund is a complete investment program and you may lose money investing in a Fund. The Fund may engage in other investment practices that may involve additional risks and you should review the Fund prospectus for a complete description.
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.
