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Investment Trust Insider: Polar Healthcare's flatlining yield requires sharp shock

Investment Trust Insider: Polar Healthcare's flatlining yield requires sharp shock

Following on from this month’s successful launch of Polar Capital Global Financials (PCFT), which raised £150 million, I thought I might have a look to see how Polar’s Healthcare fund is doing as it has just celebrated its third birthday.

Polar Capital Global Healthcare Growth and Income Trust (PCGH) launched in June 2010, raising £89 million from investors. The shares were issued with one subscription share for every five ordinary shares. The subscription shares are exercisable at £1 on 31 January 2014. The current net asset value (NAV) is 155.3p and the shares trade around this so, if nothing changes, it is likely that all subscription shares will be exercised.

This will dilute the NAV for the ordinary shareholders – at the moment it takes about 8p off its NAV – so, in reality, the ordinary shares are trading at more than a 5% premium.

The popularity of the trust has allowed Polar to expand it, issuing almost 16 million shares over the past three years so it now has a market cap of over £160 million.

Part of the initial attraction of the fund was that it would pay quarterly dividends, targeting an initial yield of 3% that would grow over time. They achieved the yield target in the first year, the dividend grew by 6% in the second year and, assuming the same pattern of dividends is maintained, the growth rate will be about 4% this year. The NAV has moved ahead much faster however and so the fund is trading on a prospective yield for the year of about 2.1%.

The managers, Dan Mahony and Gareth Powell, are stock pickers. They divide the portfolio into income and growth pools with the big pharma holdings producing most of the income.

There is a bias towards US stocks (46% of the portfolio) but this is less marked than for PCGH’s closest competitor, Worldwide Healthcare (WWH) which has around 75% invested in North America.

The base fee is 0.85% of the market cap and there is a performance fee – 10% of the outperformance of the fund’s benchmark, the MSCI World Healthcare index – and 20% of the base fee is charged to revenue. The equivalent figure for WWH is 5% but overall PCGH’s base fees are about the same as for WWH.

Looking at performance, PCGH has trailed WWH. Over three years, PCGH is up 64% with WWH 10% ahead of that. However, both funds lag the MSCI World Healthcare Index, which rose 76.4%. The main problem for both trusts in trying to keep up with the index has been the phenomenal performance of the biotech sector.

PCGH’s first three years have seen it deliver reasonable performance. It could make up some of its underperformance if, as the managers recently suggested, biotech pauses for breath.

The big question though, is can it accelerate its dividend growth? A yield of 2.1% is not enough to keep investors interested, especially if they can switch into WWH (yielding 1.5% and outperforming PCGH).

James Carthew is director of Sapient Research


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