A Word On The Markets
Global equity markets delivered solid gains in the first quarter of 2017 despite a pullback by U.S. stocks late in the period amid dimming prospects for President Donald Trumpâs proââbusiness agenda.
U.S. stocks advanced for much of the period, extending the rally that began with President Trumpâs election in November. Responding to continued economic growth, the U.S. Federal Reserve (the Fed) raised its benchmark interest rate in March and indicated that further rate hikes would be coming in 2017.Taking the Fed action as a vote of confidence in the U.S. economy, stocks rose following the rate hike. Bank stocks led the advance on expectations that bank earnings would benefit from higher rates. Strong manufacturing and jobs data also boosted equity markets. During February, the U.S. added 235,000 new jobs, topping forecasts, while the unemployment rate remained steady at 4.7%.
But U.S stocks reversed course after President Trumpâs health care bill was withdrawn from Congress. The health care failure raised concerns about the prospects for the presidentâs future economic initiatives, including tax reduction and infrastructure spending. Equities recouped some of the lost ground in the final days of the threeââmonth period.
Globally, signs of economic gains across a broad spectrum of regions encouraged investors during the period. In Asia, rising demand for semiconductors and other electronics boosted growth in the regionâs exportââoriented economies. In Europe, positive economic data and receding political risks helped push stocks higher. Even countries longââmired in recession, such as Russia and Brazil, showed signs of recovery during the period.
The MSCI World Index finished the quarter up 6.38%, driven by strong returns across the majority of sectors. Ten of the 11 index sectors posted positive returns for the quarter, led by information technology and healthcare, while energy was the lone negativeââperforming sector.
Performance Summary
For the first quarter of 2017, the Worldwide Health Sciences Fund Class A Shares outperformed the MSCI World Healthcare Index (the Index) 1, returning 9.22% at NAV, vs. 8.44% for the Index.
-- Healthcare is off to a strong start in 2017, with all index subââindustries posting positive returns for the first quarter. The health care sectorâs positive performance was driven by a number of factors, including strong earnings releases from major health care companies, new drug approvals, positive clinical trial results coming out of the biotechnology industry and a stall in the Presidentâs health care agenda in Congress.
-- Health care technology was the bestââperforming industry, followed by life science tools, and equipment and suppliers. Health care providers and services lagged for the quarter.
-- Both stock selection and industry positioning relative to the Index were positive influences on Fund performance for the first quarter.
-- The Fundâs overweight to the United States was additive to performance, as the U.S. outperformed much of the world during the quarter. Additionally, the Fundâs underweight to Japan and overweight to Belgium aided relative returns.
Quarterly Attribution Analysis
Contributors
Positive contributors for the Fundâs performance include:
-- Stock selection was strong for the quarter, most notably in health care equipment and suppliers and pharmaceuticals.
-- The Fundâs relative underweight to health care providers and services, as well as positive stock selection within the industry boosted returns for the quarter.
-- The top contributor from a stock selection standpoint for the first quarter was Wright Medical Group (WMGI, Financial), a maker of joint implants and bone graft substitutes. The company reported higherââthanââexpected revenues and investors are optimistic about the companyâs robust pipeline.
-- Within biotech, Incyte Corporation (INCY, Financial), a biopharma company which focuses on oncology and autoimmune diseases, remained a topââcontributor to Fund performance. Vertex Pharmaceuticals (VRTX, Financial) was a positive contributor as well, as the company published positive results for one of its lateââstage Cystic Fibrosis drugs.
-- Additional contributors included health care equipment company Intuitive Surgical Inc. and pharmaceutical companies Eli Lilly and Japanese ophthalmic drug maker Santen Pharmaceuticals.
Detractors
Negative contributors for the Fundâs performance include:
-- Stock selection within biotechnology was a detractor to the Fundâs relative performance, although somewhat offset by the Fundâs overweight relative to the industry.
-- The Fundâs relative performance was also hindered by an underweight to life sciences and tools, as well as negative stock selection for the quarter within the industry.
-- Stock detractors for the quarter included pharma companies Zoetis Inc. (ZTS, Financial), which reported somewhat mixed fourth quarter revenue results, and BristolââMyers Squibb (BMY, Financial) which had announced in early January news that accelerated approval for their lung cancer drug would not be sought. Additionally, biotech company Alexion Pharmaceuticals detracted from Fund performance as investors remain cautious on the name after the recent management changes.
Investment Outlook And Fund Positioning
The overall health care sector has been stuck in a range since midââ2015 after a strong multiââyear rally. We think that within the broader sector, specific industries such as pharmaceuticals and biotech are offering value. In fact, both industries are trading on the lower end of their historical valuation ranges in terms of priceââtoââearnings (P/E) ratios.
With the first attempt of the repeal of the Affordable Care Act (ACA) failing, we are watching for either a congressional pivot toward tax reform or one last push to address healthcare reform. As the political spotlight slowly shifts away from healthcare, we can get back to fundamentals.
Within the overall sector, weâre looking for innovation. We favor companies that deliver strong returns on capital and companies that have a very solid competitive advantage. Among these companies, there are some amazing things going on right now in research and development (R&D). For the past 30 years, oncology companies have been trying to move away from chemotherapy to develop targeted therapies that go right after tumors. Now, companies like Bristol Myers, Roche and Merck are actually trying to harness the human immune system to target tumors. We continue to believe there will always be a market for innovative solutions to the worldâs health problems.
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 âforward looking statementsâ. The Fundâs actual future results may differ significantly from those stated in any forwardââlooking 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 Fundâs filings with the Securities and Exchange Commission.
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