- Healthcare offers essential services that people can't go without, recession or not.
- The Tekla funds can offer potential in any one of their funds for healthcare exposure.
- Today we explore the differences and the similarities of the funds.
- Looking for a portfolio of ideas like this one? Members of CEF/ETF Income Laboratory get exclusive access to our model portfolio. Learn More »
Written by Nick Ackerman, co-produced by Stanford Chemist
Tekla offers investors four funds to choose from that are all involved in the healthcare space. There is Tekla World Healthcare Fund (THW), Tekla Healthcare Opportunities Fund (THQ), Tekla Life Sciences Investors (HQL) and Tekla Healthcare Investors (HQH). With a lack of really descriptive words in their title, one might not really know the nuances between these four funds. Today we are looking to break down each of these funds and see if they are compelling buys currently.
I will also admit, I'm a fan of healthcare overall. My most favorite sector or assets are utilities and REITs. However, healthcare comes to a close second. This is primarily due to the general stability that they can provide during recessions. It simply comes down to the fact that people need healthcare. Whether the economy is doing well or not. In 2020 we saw how resilient the space could be - excluding some subsectors that focus primarily on elective procedures.
Tekla World Healthcare Fund
Starting out with THW. This fund has been in the news most recently. They have recently completed their rights offering. This met the fund with volatility that we often see with these events. At one time the fund looked like the offering could have been accretive due to trading at such a high premium. But alas, that wasn't the case as the fund plunged and the offering was slightly dilutive. Fortunately for current investors, they saw that it wasn't a good deal and they ended up offering 6,930,639 shares and raising less than $99 million. A good thing because the more investors that would have subscribed the more damage they would have inflicted on themselves in terms of dilution.
Now that it is settled and done, we can move on. The biggest difference for THW is that they have a "global" tilt. As their name would suggest - one of the few describing words in the titles. THW "invests at least 40% of AUM in ex-U.S. companies or those with substantial ex-U.S. revenues."
The fund utilizes leverage and last reported that at 21.20%. It is the highest yielding of the funds, but not by much at this time. This is also helping to drive its popularity coming in at 8.94%. It was over 9% briefly while the share price sunk. Rising back after the RO has been chipping away at the yield. The NAV distribution rate is still over 9%; however, at 9.11%.
The fund isn't at premium levels that it was previously, but it does remain at a slight premium of 1.89%.
Since launching in mid-2015, the fund has been able to maintain the same distribution rate. I certainly don't see the rate going anywhere either at this time.
(Source - CEFConnect)
The lack of a discount in THW makes it less compelling, even after it dropped quite significantly from its previous highs. If you are looking for a slightly better yield, it might be worth nibbling. However, I believe other Tekla funds offer a more appealing entry.
Tekla Healthcare Opportunities Fund
THQ is one of my longer-term holdings. I had held THW previously before it started trading at premium levels. That being said, THQ certainly isn't as cheap as it once was either. Reducing its discount to just 2.64% lately.
THQ is similar to THW, and they do overlap some. However, they don't have the global tilt that THW shows. Instead, they "invest across all healthcare sub-sectors and across a company's full capital structure." They mention full capital structure but the majority of the portfolio is in equity securities. As is the case with all the Tekla funds. THQ also utilizes leverage around a similar amount as THW. That came to 20.03% when they last reported.
THQ has the lowest yield of the group of Tekla funds. The distribution rate coming in at "just" 5.91%. On a NAV basis, this comes to 5.76%. Similar to THW, this fund hasn't adjusted its distribution either since its inception. Though its inception rate came almost a year earlier in mid-2014.
(Source - CEFConnect)
As of today, THQ does seem like a compelling buy with some discount, though not nearly as appealing as it once was. Still, if you are lacking healthcare in your portfolio I believe that starting at least an initial position in THQ could make sense. I still find THQ to be more appealing than THW if one is going to invest today.
THW and THQ
These funds can generally be grouped together. So I wanted to compare several points of these funds before heading onto HQH and HQL - which are similar to each other.
As touched on, the major difference between these two is THW is global and THQ has no focus on global.
Going back to THW's inception, THQ has been the clear winner. This is exactly what we would expect as the global securities market had underperformed relative to their U.S. counterparts. That being said, I have noticed that THW's portfolio has slowly been going more towards U.S.-based companies. With the qualifier that it fits into their policy by "those with substantial ex-U.S. revenues." It's a big world out there and several of the larger healthcare companies do have a "substantial" amount of revenue outside the U.S. That leaves them free to invest quite flexibly. This isn't necessarily a bad or a good thing, just need to be aware that with global in its name, doesn't necessarily mean you are getting that much global exposure.
For example, they last listed 53.9% in the U.S., with 17.2% considered "substantial ex-U.S. revenue."
(Source - THW Fact Sheet)
If we switch over to THQ, they don't list a geographic breakdown. Presumably, they are 100% invested in the U.S.
On a YTD performance, we see THQ once again still beating out THW. THW's share price attempted to outpace THQ's. Due to the rights offering as previously discussed, the fund took quite the hit. Which we were able to discuss back in January and avoid the losses altogether.
If we take a look at the top ten holdings of each, we will see where they start to overlap.
(Source - Fact Sheets)
Both holding solid companies to be quite sure, though noting that some of THW's differences come in the form of Roche Holding (OTCQX:RHHBY) (this trades OTC in the U.S.,) AstraZeneca (AZN) and Novartis (NVS), which represent the global allocation. Despite that, most investors will have heard of these names as they are large companies. THW and THQ both invest in mostly large-cap traditional healthcare names.
This is important because it is one of the key differences between their sister funds that we are going to cover. HQH and HQL invest heavily in biotech names. They can be more volatile.
H&Q was originally an old investment bank that didn't focus just on healthcare. Instead, JPM bought it for the tech. From there, I wasn't able to find out how H&Q closed-end funds came out from under JPM, or if that part of the business was never acquired at all. There are just no sources.
HQL was launched in 1992 and HQH was launched in 1987.
Tekla Life Sciences Investors
This is one fund I've never really covered. Not because it is a terrible fund, but because HQH has tended to trade at a more attractive valuation. That being said, the current discount comes to 5.38% and is the widest discount of the four funds overall.
HQL primarily "invests in life sciences and other healthcare industries and will emphasize growing companies with a maximum of 40% of the Fund's assets in restricted securities of both public and private companies."
They mention that 40% can be invested in private companies. However, I have found that they don't typically invest that heavily in private companies, which would translate into level 3 securities. Their last annual report showed only around 6.6% in level 3 securities. Instead, the overwhelming majority of their portfolio is invested in publicly traded companies.
The fund has a varying distribution but the last one works out to a distribution rate of 8.57% for shareholders. On a NAV basis, it will float around an 8% distribution level.
(Source - CEFConnect)
This is because HQL and HQH have the same distribution policy of a managed 8% of NAV. It is calculated at 2% each quarter based on the NAV of the last distribution payment date.
As the fund with the widest discount, I find HQL quite attractive. Bearing in mind that its portfolio is dominated by biotech that can be more volatile. We will compare and contrast holdings more below as we did with THQ and THW above.
Tekla Healthcare Investors
Finally, we come to HQH. This fund is mostly similar to HQL. Their investment policy is this; "investing in healthcare industries with an emphasis on mid to large cap biotechnology and pharmaceutical growth companies with a maximum of 40% of the Fund's assets in restricted securities of both public and private companies."
They offer even slightly less exposure to private companies at only around 6.1% allocation to level 3 securities at the end of their last fiscal year.
While this fund traditionally carried the large discount between HQL and itself, the current discount comes to 4.09%. Both HQL and HQH's NAVs were hit pretty hard recently, which has led to the evaporation of their discounts primarily. Unfortunately, not due to their share price appreciation.
Invested similarly and with the same distribution policy, we see HQH's distribution chart varies as well - as expected.
(Source - CEFConnect)
HQL and HQH
One thing to note with both of these "twins" is that neither one of these funds uses any leverage. This can be beneficial as their underlying investments are volatile enough.
Here too, neither shows any breakdown for geographic exposure. Presumably, being invested in U.S. securities. We see some considerable overlap when we start to take a look at their top ten holdings.
(Source - Fact Sheets)
With this, it makes it quite hard to see the difference between the two. We have to take a look at the sub-sector allocations to start getting a better understanding.
(Source - Fact Sheets)
From here is where we can start to see a bit of a difference in the approach of the funds. HQL favoring a higher allocation to biotech at a nearly 10 point difference. Still, it hasn't resulted in a significant difference in terms of performance.
If we go back to the total returns since HQL's inception, we see that the funds follow each other quite closely.
On a YTD basis, we see HQH outperforming slightly. This is primarily due to the fact that biotech - being lumped in with the "growth" category - took a material hit this year.
Things were cooling down for the growth sector and we saw that play out in both of these funds. We touched on above, both funds' discounts are rather narrow relative to their historical range. Though it wasn't through share price appreciation, but rather NAV declines - which is what we don't regularly want to see!
As we can see from the chart below looking at the premium and discounts, the latest hit to NAV per share did reduce discount levels on both funds. This was by a fairly substantial amount too for both. We also see that HQH isn't the best value anymore. This was after the last several years of being just that.
To tie it together briefly:
- THW focuses mostly on large-cap traditional healthcare names with a small focus on global positions.
- THQ focuses mostly on large-cap traditional healthcare names based solely in the U.S.
- HQL focuses the heaviest exposure to biotech that can be more volatile.
- HQH also focuses on biotech but at a slightly reduced allocation relative to HQL.
In terms of what I see as attractive, I find HQL and THQ the most compelling and if I were adding today, it would be those two - keeping in mind that HQL's underlying holdings are more sub-sector specific and can add more volatility being in biotech. Although, do note that THQ's (and THW's) leverage will also increase their relative volatility levels as well. HQH and THW could easily be considered solid "Holds."
Healthcare overall is an essential service that can continue in good times or bad. Therefore, can be an essential part of an investor's portfolio. Utilizing the Tekla funds for such exposure can also be ideal for income investors as all four funds, while having varying yields, pay significantly more than what you can get from these individual names. Of course, that means they are paying out portions of distributions from income, capital gains and/or return of capital.
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This article was written by
I provide my work regularly to CEF/ETF Income Laboratory with articles that have an exclusivity period, this is noted in such articles. CEF/ETF Income Laboratory is a Marketplace Service provided by Stanford Chemist, right here on Seeking Alpha.
Analyst’s Disclosure: I am/we are long HQH, THQ, JPM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
This article was originally published to members of the CEF/ETF Income Laboratory on April 19th, 2021.
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