BB HEALTHCARE TRUST PLC

LEGAL ENTITY IDENTIFIER ('LEI'): 213800HQ3J3H9YF2UI82

HALF YEARLY FINANCIAL REPORT

For the six months ended 31 May 2021

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

Investment objective

The investment objective of 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 half-yearly report.

CHAIRMAN'S STATEMENT

Introduction

'I have seen so many extraordinary things, nothing seems extraordinary any more'

Lewis Carroll

A year ago, I started my half year statement by saying that the previous six months had been 'truly historic'. At the year end, I described the last year as 'extraordinary'. As the pandemic has continued it is easy to think that 'nothing seems extraordinary any more'.

However, people still, sadly, continue to die, and health systems around the world are still on high alert; albeit the roll-out of vaccines is, hopefully, bringing the pandemic slowly under control.

Again, may I extend our deepest sympathies to any readers who may have lost any loved ones.

One of the drivers for the launch of the Company was the expectation that healthcare systems would need to change to cope with increasing demand (demographics, new treatments), innovation and budget constraints. This continues to be the core focus of the Company and, if nothing else, the pandemic has served to highlight just how necessary such changes are.

Board composition

I am delighted to report that Kate Bolsover joined the Board in July 2021. Kate has extensive investment trust experience as a non-executive, including as chair, and brings not only a wealth of corporate governance experience but has also worked in the asset management sector within sales and marketing.

The Company is compliant with the recommendations of the Hampton-Alexander Review (female representation) and the Parker Review (ethnic diversity) on boards and is a pioneer in the sector in aligning board and shareholder interests through share-based compensation with a lengthy lockup period and by ensuring it can challenge the Investment Manager through a wealth of healthcare and investment management experience within the group.

Performance review

During the period under review (1 December 2020 to 31 May 2021), the Company's share price and NAV increased 6.9% and 5.7% respectively. Including the final dividend for the financial year ended 2020, the Company's shares delivered a total return of 8.3%. The total NAV return (i.e. assuming reinvestment of dividends) was 7.1%. In comparison, the MSCI World Healthcare Index delivered a total return in sterling of 3.9% over the same period.

On average, the Company's shares continued to trade at a modest premium of 1.2% to NAV over the period in review, albeit with a slightly more elevated level of volatility in the premium. Every November, we give the opportunity for shareholders to redeem through the Company - thereby hopefully ensuring that the share price and NAV stay closely aligned.

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 Investment Manager missives. Having read, and indeed composed, more monthly factsheets than I care to remember, I feel it is important they allow an Investment Manager to comment openly and freely on their views.

Alas, many such factsheets are confined to a few cursory paragraphs, often written by professional 'investment writers' to align with a 'house view'. Such pieces rarely convey the thoughts, concerns and indeed personality of the people actually managing the money. The Company has always encouraged a more discursive and frank discourse since, for many investors, this will be their main avenue of 'dialogue' with the Investment Manager. The factsheets are available on our website.

Key market developments

Healthcare is inherently a 'defensive growth' sector. Such a description belies the level of analysis and research by our Investment Manager to ascertain which companies are generating new innovative solutions for healthcare and which are living on past glories.

COVID-19 has also shown the necessity to be nimble and flexible - if for no other reason than because circumstances can change rapidly. Operationally, I am pleased to report that the Company and its service providers have continued to perform admirably and adapted well to working from home. As such, I am satisfied that we can weather any future lockdowns from an operational perspective, if such a scenario were to arise again.

Although the managers have been unable to travel to meet investee management teams, enforced home working for senior executives at these companies has paradoxically made it easier to schedule virtual meetings, allowing for continued high levels of corporate access.

Dividends, gearing and issuance

As announced on 2 December 2020, the target dividend for the 2021 financial year is 6.03p - this being 3.5% of the net asset value on 30 November 2020. The Directors are pleased to declare an interim dividend for the 2021 financial year of 3.015p per Ordinary Share which will be funded from the Company's distributable reserves. As usual, a scrip dividend option will be available.

We acknowledge that a substantive part of the dividend is from capital - but this seems better than a very nominal dividend solely driven by the dividends of our underlying investments. Furthermore, it allows the Investment Manager to pursue a strategy of capital growth without having to look over their shoulder at a certain dividend expectation. As GlaxoSmithKline's historical total shareholder return and recent dividend cut attests, reinvesting in one's business to stay at the front of a rapidly innovating industry is at odds with paying out the majority of one's free cashflow as a dividend.

As of 31 May 2021, the Company was running a modest gearing position of £6.4 million, equivalent to 0.7% of the gross exposure. At launch, the Company committed to being fully invested, but the Board recognises that the Investment Manager must have some flexibility around market timing, particularly in the current environment, and we have set a soft ceiling of 10% for the maximum net cash position. Maximum gearing remains at 20% of NAV and we still expect the long-term average gearing position to be mid-to-high single-digit positive.

As previously disclosed, we renewed and novated our revolving credit facility with The Bank of Nova Scotia, London Branch on 25 January 2021 for up to $150 million. The facility expires in January 2022. As of 31 May 2021, the aggregate of loans drawn down was £24.6 million ($35 million).

During the first half of 2021, the Company issued 45.6 million new shares, thus increasing the total number of shares outstanding as at 16 July 2021 to 540.0 million, giving the Company a market capitalisation of £1.1 billion, compared to £719.7 million at the end of the prior period.

We joined the FTSE 250 on 22 June 2020. Since then, the market value has risen above £1 billion. These milestones are only important in as far as they benefit shareholders, through increasing liquidity and spreading costs over a wider asset base so the ongoing charges ratio declines.

Ultimately however, what matters is performance (net of fees) and how we compare to alternative choices either within the sector or the market generally. These are comparisons that the reader should make for themselves - but we see the continued demand for the Company's shares reflecting a positive view of the Company's investment performance.

Outlook

The extraordinary times are likely to continue - even 'normalisation' will not be back to the previous normal - who for instance would have considered 'telemedicine' or 'working from home' to have become mainstream 18 months ago?

However, I am reminded of an article on 29 November 1879, in the Lancet, that suggested using the telephone to reduce unnecessary home visits. What was particularly impressive about the article was that Alexander Graham Bell had uttered the words 'Mr Watson, come here, I want you' just over 42 months previously, on 10 March 1876. The Mercury space program led to NASA developing remote monitoring in the 1950s, (although again a letter in the Lancet had suggested telephonic auscultation to replace the stethoscope on 9 February 1878¹).

Thus, though we live in extraordinary times, in many ways the more the world changes, the more it seems it is the same ('plus ça change, plus c'est la mȇme chose').

Certainly, for a fund looking for innovation in healthcare, the one statement we can make about the outlook is that innovation is both necessary, and will continue.

On behalf of the Board, I wish you and your families good health and thank you for your continued support of the Company and please do not hesitate to contact me on shareholder_questions@bbhealthcaretrust.co.uk  if any additional information is required.

Randeep Grewal

Chairman of the Board of Directors

16 July 2021

[1] See https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1081896/pdf/medhist00108-0074.pdf

INVESTMENT MANAGER'S REPORT

Macro environment

Wearisome as it has become for us all, the SARS-CoV-2 pandemic has continued to dominate the overall market narrative. The debate was a more constructive one though, focusing not on the tsunami of economic and personal suffering wrought by the virus, but rather the timing of recovery and return to some form of normality, at least for Western economies.

We swiftly moved from a "re-opening and recovery" theme in late 2020/early 2021, to a market rotation from growth to value and toward pro-cyclical and pro-inflationary assets (such as financials and raw materials), since it was obvious that a rapid return to broader economic activity would usher in short-term inflationary pressures. Interest rates will undoubtedly rise to levels more in line with historical norms, but the debates as to when and at what cadence feel a little melodramatic to us. Economic growth is back, and that is good.

Defensive growth assets such as healthcare, which served well as a safe haven during the long period of uncertainty over the economic outlook that the pandemic created, would be an obvious source of capital for the mutual fund manager looking to increase their cyclical exposure and regular readers of our factsheet will be aware that we cautioned these would be difficult waters to successfully navigate.

And so it proved to be the case; in sterling terms, the MSCI World Healthcare Index materially underperformed the MSCI World Index over the Company's fiscal H1 2021, yielding a total return of 3.9% versus 9.6% for the wider market, with the majority of the underperformance arising after the end of January, as the re-opening theme gave way to the inflationary narrative.

The acceptance of 'a return to normality' (whatever that means amidst so many enduring restrictions and practical hurdles to behaving as one might ultimately aspire to) as an inevitable reality rather than an ethereal hope, and the attendant rise in equity benchmarks has left us picking up where we left off at the end of 2019:

Markets are not obviously "cheap" (when thinking about the price of growth compared to historical norms) and there are some lingering political headwinds, not because there is a looming election but rather because the market seems unwilling to trust a Democratic legislature to stick to the planned programme and not seek to punish capitalism's more egregious winners in some way.

Investors are thus wary that the positive returns in the first half of the year may not be repeated in the second half. What might this mean for healthcare, on a relative and an absolute basis?

Healthcare Outlook

Healthcare is not immune to the Damoclean turpitude of market perceptions regarding political risk, especially when it comes to drug pricing and the health insurers, for whom the disruption wrought by the pandemic has proven a rewarding respite.

However, we remain of the view that, with a contested Congress and an ambitious agenda that is being prioritised ahead of healthcare, the risks of a significant negative surprise during this two year period before the 2022 mid-term elections is low. Thereafter, it probably becomes even more difficult to pass any contentious legislation as the Democrats very narrow majority in the House may be lost.

Returning to the pandemic, expectations are for a normalisation in procedure volumes toward the end of the year and this seems to be well priced, in terms of both valuations and consensus expectations. Currently, this seems a realistic goal since vaccines appear sufficiently efficacious to mitigate the risk of novel variants causing additional spikes in the COVID-19 hospitalisation and death rates (the only things that matter to our minds). Second-generation booster vaccines more finely attuned to these variants are likely to be available before year-end, but we may not need them.

Although utilisation of currently available surgical capacity should continue to improve, we continue to think it unrealistic that system-wide capacity will return to 2019 levels (recall the NHS for example has removed some 20,000 beds to allow for more distancing between patients) until the pandemic is firmly in the rear-view mirror.

With this in mind, backlogs for less urgent procedures may take some time to clear (we think the NHS waiting lists will continue to rise) and we must also factor in the human element: if you were elderly and now enjoying some freedoms having been double-jabbed, would you really want to rush to hospital for that hip or knee op and the attendant 6+ weeks of resting at home? We continue to take a cautious approach to procedural exposure for the Company, focusing on the high acuity (i.e. urgent care) end of the spectrum and eschewing minor procedures and orthopaedics.

We would broadly agree with the notion that the second half of the year could prove more tricky for equity investors than H1 2021 has been. Within this though, healthcare feels well placed to us. The restrictions impacting us all are slowly abating and the innate demand for healthcare services is undiminished. As such, we can be very confident in the broader positive fundamental outlook for healthcare during H2 2021 and beyond and as such, we do not expect healthcare to underperform the wider market in the manner that it did during the first half of the year.

It bears repeating that our strategy of investing into "healthcare change" remains a powerful and compelling one. Healthcare continues to be the secular growth story of our age; there are ever more people and they are ageing. More and more countries are becoming developed economies and scientific progress continues to open up new avenues to relieve the burden of human suffering, raising expectations of what products and services will be available to them.

However, society needs to pay for all of this and the current model is neither easily scalable nor financially sound. If we cannot bend the cost curve and change the delivery paradigm, the services will need to be cut or the system will go bankrupt. Ergo, healthcare must change. There is no alternative. Moreover, the tools, products and services to re-imagine healthcare already exist and can be accessed through the public equity realm, creating a persuasive equity opportunity.

Performance review

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.

Figure 1

(1) Note - the stated total shareholder return assumes the reinvestment of dividends.

During the period under review, the Company generated a total return for shareholders that exceeded the wider healthcare sector, maintaining the overall trend of outperformance since inception. Although the broader market (both globally and for the UK) did fare better during the period under review, the Company maintained its materially higher total return since inception.

Our preferred metric for assessing the performance of the Company is the rolling three-year annualised return, where we aspire to deliver both an excess return versus the MSCI Healthcare comparator Index and a double-digit return. As discussed above, we continued to deliver on both these ambitions including the period in review.

The Company's cum income net asset value ("NAV") rose 5.7% to 182.26p and the share price rose 6.9% to 183.80p. Including the final financial year 2020 dividend of 2.50p, the Company's NAV delivered a total investment return of +7.1%. The evolution of the Company's NAV during fiscal H1 2021 is illustrated in Figure 2. The appreciation of sterling represented a material headwind during the period, with the key GBP/USD exchange rate rising >6% over the six months. Figure 1 also shows the extent of the retrenchment in the NAV during May 2021.

The Healthcare Index's performance by sub-sector is summarised in Figure 2 and in many ways typifies the reversal of the pandemic thematic prevalent during our fiscal H1 2020. In that a period, Healthcare IT and Healthcare Technology led the performance table, with Facilities and Dental the laggards. This was all about virtual care and the eschewing of non-emergency routine procedures. Now the converse is true; care is moving back from the virtual to the physical realm. Dental has been more of a surprise, driven by a Zoom-led upswing in adult tooth straightening.

Managed Care continues its recovery from decade lows as the normalisation of procedure rates is increasingly recognised as a manageable earnings headwind and as political risks abate to some degree. Therapeutics has struggled (along with the related generics and drug distribution sub-sectors) as political overhangs persist and the volume recovery in drug sales takes time (lest we forget, it is routine family doctor appointments that generally drive volumes for non-specialty medicines and yet such check-ups remain a nostalgic notion for many elderly patients.

Figure 2

Portfolio evolution

The vicissitudes of the pandemic necessitated a certain amount of nimbleness with respect to asset allocation amidst the rapidly evolving landscape for healthcare provision and the attendant valuation consequences of investor crowding into obvious laterals around this dynamic.

The evolution of these changes are summarised in Figure 3, charting the evolution of the portfolio on a calendar quarterly basis from the pre-pandemic period to the end of Q2 2021. A number of trends are evident: amidst the pandemic, we eschewed procedural exposures (via Med-Tech and Facilities) and increased our coverage of essential medicines, where we were confident of uninterrupted repeat business from needy customers.

Exposures to Healthcare IT and Healthcare Technology were scaled back, principally on valuation grounds, but the recent value-oriented market rotation has enabled us to regain similar overall exposure to these two areas as was the case pre-pandemic.

Diagnostics exposure was scaled back as valuations became more challenging and then fell materially on the back of M&A. This remains a very attractive area in our minds and we have now begun to rebuild exposure, but remain disciplined on valuation. Dental is very expensive, so we stay on the sidelines and the Services and Tools sectors continue to be attractive owing to highly visible and predictable growth.

In the round, we are very much investing on a 'post-pandemic' basis and are pleased that we have felt confident to return to having a broad-based portfolio compared to the Summer of 2020 (the portfolio consisted of 31 active positions at the end of May 2021, compared to 27 at the end of September 2020) and that we are again modestly geared (1.4% gearing as at the end of May 2021, versus 9.1% cash position at the end of September 2020).

Figure 3

The past year has been very tough for a great many people, but we are hopeful that some semblance of normality will take hold in the coming weeks and we can all begin to put this pandemic behind us.

Paul Major and Brett Darke

Bellevue Asset Management (UK) Ltd
16 July 2021

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 below, together constitute the Interim Management Report of the Company for the six months ended 31 May 2021. The outlook for the Company for the remaining six months of the year ending 30 November 2021 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 2020, which can be found on the Company's website at www.bbhealthcaretrust.com.

Since the publication of the 2020 annual financial report on 1 March 2021, the COVID-19 pandemic continues to be a serious threat to most parts of the global economy and the Board continues to monitor the situation closely and is in regular contact with the Investment Manager and the Company's other service providers in order to assess and mitigate the impact on the Company's investment objectives, investment portfolio and shareholders. Otherwise, in the view of the Board, these principal and emerging risks and uncertainties are substantially unchanged from the year end and are as much applicable to the remaining six months of the financial year, as they are to the six months under review. 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 cyber security);

•             Regulatory risks; and

•             Financial risks.

The Board are of the opinion that these key principal risks remain, but mindful of their obligations under the changes made to the AIC Code of Corporate Governance issued in February 2019, the Board has also reviewed emerging risks which may impact the forthcoming six-month period. These emerging risks include:

•             The ongoing impact of the COVID-19 pandemic; and

•             The increasing global geopolitical tension.

Related party transactions

The Company's Investment Manager is Bellevue Asset Management (UK) Ltd ('Bellevue UK'). The Company announced in April 2020 that it had appointed Bellevue UK as the Alternative Investment Fund Manager ('AIFM') of the Company. 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 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 paid during the six months ended 31 May 2021 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 2020.

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 2021 were £973.8 million (31 May 2020: £717.0 million). As at 31 May 2021, the Company held £980.6 million (31 May 2020: £682.3 million) in quoted investments and had cash of £25.7 million (31 May 2020: £82.6 million). The total expenses (excluding finance costs and taxation) for the six months ended 31 May 2021 were £5.1 million (31 May 2020: £3.4 million).

In light of the COVID-19 pandemic, the Directors have fully considered and assessed the Company's portfolio of investments. A prolonged and deep market decline could lead to falling values in the Company's investments or interruptions to cashflow. However, the Company currently has more than sufficient liquidity available to meet any future obligations.

The market and operational risks associated with the COVID-19 pandemic, and the ongoing economic impact of measures introduced to combat its spread were discussed and are continually monitored by the Board. The Investment Manager, Administrator and other key service providers are providing regular updates on operational resilience in light of the COVID-19 pandemic. The Board is satisfied that the key service providers have the ability to continue their operations efficiently in a remote or virtual working environment.

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
16 July 2021

   Adoption of new and revised standards

   At the date of approval of these financial statements, there were no new or revised standards or

   interpretations relevant to the Company which came into effect.

  During the period, Ordinary Shares issues include, the Company's scrip dividend issue of 474,537 Ordinary Shares.         

  These Ordinary Shares were allotted and issued with aggregate proceeds of £892,000.

GLOSSARY

Contact information:

Brian Smith/Ciara McKillop           0204 513 9260 

PraxisIFM Fund Services (UK) Limited

The Half-yearly financial report will be submitted to the National Storage Mechanism and will shortly be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism