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Holly LaFon
Holly LaFon
Articles (7914) 

Eaton Vance Worldwide Health Sciences Fund 2nd Quarter Commentary

Review of markets and performance

August 09, 2017

A Word On The Markets

Global stock markets delivered solid results in the second quarter of 2017, as broad economic expansion continued to offset political uncertainties in some regions.

In the U.S., ongoing concerns about prospects for President Trump’s economic policies restrained stocks early in the quarter. Equities subsequently shook off these worries amid positive economic data. In particular, manufacturing gains and a further decline in the jobless rate provided encouragement to investors. Consumer spending also rose despite a decline in auto sales from their post‑recession peak.

Amid the encouraging economic data, the U.S. Federal Reserve (Fed) raised interest rates in June for the third time since December 2016. The Fed also said it would start gradually selling off the securities it bought during and after the financial crisis to boost the economy.

On a global basis, stronger economic growth aided stocks in Europe and Japan. The election of a new government in France helped to ease political uncertainties, although an election setback for British Prime Minister Theresa May added to confusion about Britain’s plans to exit the European Union. In China, the success of the government’s stimulus policies led to a rise in interest rates to avoid economic overheating.

China’s upswing helped boost growth elsewhere, particularly in emerging markets.

The MSCI World finished the quarter up 4.03%, driven by solid returns across the majority of sectors. Nine of the 11 index sectors posted positive returns for the quarter, led by healthcare, industrials, and financials, while energy and telecommunications posted negative returns for the period.

Performance Summary

For the second quarter of 2017, the Worldwide Health Sciences Fund Class A Shares lagged the MSCI World Healthcare Index (the Index)1, returning 5.43% at NAV, vs. 6.94% for the Index.

-- Healthcare is off to a strong start in 2017, with all index sub‑industries posting positive returns for the first quarter. The healthcare sector’s positive performance was driven by a number of factors, including strong earnings releases from major healthcare companies, new drug approvals, positive clinical trial results coming out of the biotechnology industry and a stall in the President’s healthcare agenda in Congress.

-- Life science tools and healthcare technology were once again the leading industries in the second quarter, followed by equipment and suppliers and healthcare providers. Pharmaceuticals and biotechnology, which together make up nearly 65% of the index, were the laggards during the quarter, although both industries returned over 5% within the index.

-- Stock selection within the Fund was negative for the quarter, while industry selection relative to the index had little overall impact.

-- The Fund’s underweight to European health care stocks was negative during the quarter. The overweight in the US was moderately negative.

Quarterly Attribution Analysis

Contributors

Positive contributors for the Fund’s performance include:

-- Stock selection within healthcare providers, healthcare equipment, and life science and tools were all positive contributors for the quarter. Additionally, the Fund’s overweight to equipment & supplies, and underweight to pharmaceuticals aided relative returns.

-- The top contributors during the second quarter were within healthcare equipment and suppliers. Intuitive Surgical, a robotic surgery manufacturer, was the top contributor for the quarter. Intuitive delivered strong second quarter performance and provided a favorable outlook for both its sales ramp and product pipeline. Elsewhere within the industry an overweight position to Edwards Lifesciences, a leading manufacturer of heart valves, posted strong quarterly results.

-- Within pharmaceuticals, the Fund’s overweight in Zoetis, the leading animal health company, contributed to performance. The Fund also benefited from its underweight to

Merck & Co, a sizable index constituent.

-- Additional contributors included healthcare equipment company Cooper Companies, European pharmaceutical drug maker Patheon NV which was acquired by Thermo Fisher and health insurer Aetna Inc.

Detractors

Negative contributors for the Fund’s performance include:

-- Biotechnology was the largest detractor to relative performance during the quarter, primarily caused by negative stock selection and an overweight position relative to the Index. Shire PLC and Alexion were the largest stock detractors within biotech.

-- Stock selection within pharmaceuticals negatively impacted performance during the quarter. An overweight in Eli Lilly in the U.S. and UCB in Europe combined with an underweight in Bayer in Europe detracted from performance.

-- Additional detractors during the quarter included an overweight in Wright Medical Group, a maker of joint implants and bone graft substitutes, an overweight in Santen Pharmaceuticals and an underweight in Novartis.

Investment Outlook And Fund Positioning

The overall healthcare sector has been stuck in a range since mid‑2015 after a strong multi‑year rally. We think that within the broader sector, specific industries such as pharmaceuticals and biotech are offering value. Both industries are trading on the lower end of their historical valuation ranges. Efforts to repeal and replace the Affordable Care Act have stalled. The Republican‑led

Congress has been unable to find a middle ground to satisfy both the conservatives and moderates within the Republican party. As a result, industry‑related fees/taxes for medical devices, pharmaceutical and the health insurance industries remain in place. Medicaid expansion, once in jeopardy under the proposed legislation, appears likely to continue. We are watching for the potential of increased funding to stabilize the individual insurance exchanges. However, the congressional agenda starting in September is jam‑packed with items such as the

FY18 budget, the debt ceiling debate and tax reform.

We seek to invest in innovative companies. We favor companies that can deliver strong returns on capital and have a solid competitive advantage. On the innovation‑front, companies like Bristol Myers, Roche, and Merck are using on new approach to solve an old problem: cancer. For the past 30 years, oncology companies have been trying to move away from chemotherapy and target tumors directly. Now, the science is moving toward harnessing the human immune system to target tumors. The next five years should be very promising for cancer research. We continue to believe there will always be a market for innovative solutions to the world’s health problems.

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.


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