Paul MacDonald’s Top Picks: May 3, 2019
Paul MacDonald, chief investment officer and portfolio manager at Harvest Portfolios Group
Focus: Healthcare stocks
The healthcare sector is a direct beneficiary of one of the only secular, non-cyclical and permanent investment themes: the global aging population. Moreover, as wealth increases in developing economies, there’s a disproportionate increase in the amount of spending on healthcare; this will likely result in significantly increased demand for healthcare products and services over time. Finally, technological innovations coupled with regulatory advancements pave the way for catalysts across healthcare subsectors.
Political discussions on how to deal with the rising healthcare costs over recent years have caused sector volatility to increase and valuation multiples to contract. Healthcare is expected to be a key topic during the 2020 U.S. presidential election. Healthcare policy posturing by some Democrats running for the leadership of the party is seen to be extreme and raise concerns and even panic that the healthcare companies would be victimized under certain policy proposals. We view the proposals such as those from Bernie Sanders as political posturing and a way to capture headlines, being highly unlikely to impact the companies operating in the sector. Political posturing happened earlier than most had anticipated in the election cycle and we view the correction as an opportunity, with the fundamentals for the underlying businesses remaining intact and valuation multiples in many cases compressing to levels not seen in over a decade. We continue to advocate diversity across the sub-sector to minimize individual binary risks.
The underlying outlook remains robust with numerous short- and medium-term stock-specific catalysts coupled with expectations of improving top- and bottom-line financial performance.
Lastly, the increase in the implied volatility levels has resulted in attractive income derived from covered call strategies such as the one used in the Healthcare Leaders Income Fund.
HARVEST HEALTHCARE LEADERS INCOME ETF (HHL.TO)
The Harvest Healthcare Leaders Income ETF invests in an equally weighted portfolio of 20 large-cap healthcare issuers that trade on a North American exchange and have listed options. The Fund uses a quantitative screening process for security selection and an active and flexible covered-call strategy to generate additional income. There are two classes of the ETF that trade on the Toronto Stock Exchange: HHL.TO is priced in Canadian dollars and hedges the portfolio’s non-Canadian currency exposure, while HHL_u.TO trades in U.S. dollars and is not currency-hedged.
Performance as of: March 31, 2019
INDEX: MSCI World Healthcare Net Total Return USD Index.
Returns are based on reinvested dividends, net of fees and annualized.
TOP 5 HOLDINGS:
- 1 month: 5.4% fund, 1.7% index
- 1 year: 6.9% fund, 12.2% index
- 3 years: 7.0% fund, 10.9% index
- Stryker: 6%
- Johnson & Johnson: 5.6%
- Allergan: 5.6%
- GlaxosmithKline: 5.4%
- Sanofi: 5.4%