THW: Just for now let’s ignore the price lag and enjoy the yield

Ibrahim Akcengiz

When I last covered in May 2022, I was bullish about the Tekla World Healthcare Fund (NYSE: THW) for various reasons. I gave a list of ten reasons to love the stock:

i) yield close to double digits, ii) monthly dividend unchanged over the past 80 months, iii) a rare exception to healthcare funds which rose in April 2022 as well as over the past three months, iv) relatively better protected against market risk, v) sound stock selection vi) major investments generating strong returns when the whole healthcare sector is down, vii) positive total return almost guaranteed, viii) successfully weathering the market crash related to the covid-19 pandemic ix ) sufficiently strong performance over the past 3 years, and x) an extended buyback program that should withstand any loss.”

In six months, I would like to know how many of the reasons mentioned above still exist.

Tekla World Healthcare Fund and its globally diversified portfolio

THW is one of four closed-end healthcare mutual funds (“CEFs”) launched and managed by Tekla Capital Management LLC. The other three are Tekla Healthcare Investors (HQH), Tekla Life Sciences Investors (HQL) and Tekla Healthcare Opportunities Fund (THQ). All of these funds invest primarily in public shares of companies operating in the healthcare sector. However, Tekla World Healthcare Fund also invests in corporate debt securities to balance its portfolio in terms of risk and return. THW diversifies its investments in various sub-segments of the healthcare sector, with almost 40% of investments in pharmaceuticals.

A further 36% is invested in stocks of managed healthcare service providers and manufacturers of medical devices and healthcare equipment. THW has invested less than 1/5th of its total assets in life science tools and services, biotechnology and healthcare real estate investment trusts (“REITs”). Stocks from these three sectors are the most volatile in the healthcare sector. Based on the distribution of investment opportunities, the fund, in my opinion, has invested in the right kind of stocks – something I consistently advocate. THW has also invested a quarter of its assets outside the US stock market. This provides the Tekla World Healthcare Fund with some cushion in case US markets do not behave as expected.

Tekla World Healthcare Fund’s portfolio derives its strength from its global diversification and strong growth in its core investments. As I explained in May 2022:

“THW’s top five investments – UnitedHealth Group Inc. (UNH), Roche Holding AG (OTCQX: RHHBY), Pfizer Inc. (PFE), AstraZeneca PLC (AZN) and Thermo Fisher Scientific Inc. (TMO) – have returns positives in the range of 11 percent to 28 percent over the past year. If the top 25% of a healthcare fund’s investments generate such high growth at a time when the entire healthcare industry is in a downward recovery, the fund can be trusted to produce good yields. »

Tekla World Healthcare Fund is for income seeking investors

Tekla World Healthcare Fund generates a high dividend yield. It has generated an average annual return of nearly 10% over the past 5 years. The dollar value of the monthly payment has remained almost static for the past 87 months despite the covid-19 pandemic, inflation, interest rate hikes and economic uncertainties resulting from the invasion of Ukraine by Russia. Such high performance has allowed THW to maintain a healthy, if not positive, total return. Otherwise, the market price has fallen almost 14.3% over the past 6 months. This happened due to the poor price performance of its major stocks. 10 of its top 15 holdings did not generate positive price growth during this period. Again, this was one of the worst times in biopharma.

RHHBY, PFE, AZN and TMO all generated negative price growth. In addition to these, Johnson & Johnson (JNJ), AbbVie Inc. (ABBV), Abbott Laboratories (ABT), Novo Nordisk A/S (NVO), Novartis AG (NVS) and Stryker Corporation (SYK) have no also failed to generate prizes. growth. Stocks like UNH and Bristol-Myers Squibb Company (BMY) also saw weak (albeit positive) price growth over the same period. Currently, nearly 47% of THW’s assets are invested in these 12 stocks. For obvious reasons, investors had to take a capital loss in the last six months. But there is a high probability that they bought THW at a price lower than the current market price. THW has been trading below $14 for a significant period this year. In such a case, the double-digit return is surely lucrative for THW investors.

My reasoning behind supporting this stock remains the same from the very beginning. As mentioned during my February coverage:

“[T]here are various other metrics, like our aging demographics, pandemic recovery, etc., that make me bullish on its top investment stocks. Undoubtedly, this fund is for income-seeking investors. However, in addition to the strong dividend performance since September 2015, the positive price performance since March 2020 and the smart diversification of its funds, Tekla World Healthcare Fund can also be considered a wise investment in the current scenario.

Since my last coverage, the fundamentals remain the same, ie the title is as attractive as before. The price loss is very relative, and provided investors bought this fund at a low price, there is no reason not to be bullish on the Tekla World Healthcare Fund.

Investment thesis

Thus, THW continues with a regular monthly payment and generates a near double-digit return. The stock is relatively better protected against market risk due to its global diversification and its investments in various segments of the healthcare sector. However, it has not made progress over the past six months as its major holdings have failed to generate price growth. But, due to such a high return, the total return is relatively healthy and stands at around 8-9% in the medium term. Overall, THW’s performance over the past 3-5 years can be described as above average. I expect this trend to continue for another 2-3 years as fear of recession and economic uncertainties loom.

In a previous coverage in February 2022, I mentioned that:

“Even in the worst case scenario, if the fund hits a new low in the short term, in the long term it will rebound (thanks to its careful stock selection) at least to the current price level of around $14. And as I I mentioned earlier, with such a regular monthly dividend payment and relatively higher dividend yield, investors can easily reap the benefits of this fund.

In my opinion, this stock has the essentials that income-seeking investors seek – just ignore the price growth and enjoy the yield. And since the current price is somewhere close to my expected long-term floor price, I think it’s a good time to accumulate a few more units of the Tekla World Healthcare Fund.

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