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Performance
The Trust (NYSE:BMEZ) returned -4.4% on net asset value and -4.0% on market price over Q2 2024,underperforming its benchmark, the MSCI Custom ACWI SMID Growth Health Care Call Overwrite Index, which returned -2.9%.1
Global equity markets continued to rise over the second quarter with the MSCI World Index increasing by +2.6%. In the US, the S&P 500 Index (SP500, SPX) returned +4.3% over the quarter, led higher by the information technology and communication services sectors. Throughout the period, a resilient labor market and cooling inflation led policymakers to moderate their tones. In the Eurozone, equities declined due to uncertainty surrounding political elections and reduced expectations for significant interest rate cuts. In early June, the European Central Bank (ECB) initiated its rate cutting cycle despite an increase in annual inflation. Contrastingly in the UK, the Bank of England (BoE) held interest rates steady, although yet markets were supported by strong energy and commodities returns and robust corporate earnings. In Japan, equities pulled back after a strong first quarter. The Bank of Japan (BoJ) left policy rates unchanged to support the weakening Yen. Elsewhere in China, economic data demonstrated signs of recovery and led equities higher. Concurrently, ongoing domestic demand issues and real estate challenges contributed to investor uncertainty around the country’s economic health.
The health care sector reported robust financial results over the quarter. Companies involved in GLP-1 product development and commercialization reported strong earnings due to sustained high demand.2 GLP-1 market leader Novo Nordisk (NVO) continued to expand into international markets by securing approval for its GLP-1 drug, Wegovy, in China.3 Meanwhile, potential new entrants such as Amgen (AMGN) and Roche (OTCQX:RHHBY) have also advanced developments, reporting positive trial results for their GLP-1 obesity medications.4
Despite a challenged macroeconomic environment, the biotechnology sub-sector has shown continued innovation. Alnylam Pharmaceuticals (ALNY) reported that its RNA interference drug, vutrisiran, significantly reduced the risk of death or recurrent cardiovascular events in patients with ATTR-CM, a rare heart disease.5 Elsewhere, the Food and Drug Administration (FDA) approved Merck’s (MRK) pneumococcal vaccine which protects against 21 strains of bacteria that can lead to infection in the lungs, blood, or spinal cord.6
After an uptick in Q1 2024, where transactions doubled year- over-year, M&A activity within the health care sector remained robust as large companies continued leveraging their strong cash positions.7 Notably, Merck announced plans to acquire EyeBio for $3bn to access EyeBio’s pipeline of vision loss treatments. In the medical device market, Boston Scientific (BSX) announced an acquisition of Silk Road Medical (SILK) for $1.3bn.8 The move is aimed at expanding their cardiovascular business by adding Silk Road’s stroke prevention devices to their product suite.9
Contributors to Performance*
US growth stocks outperformed over the period as softer than expected Consumer Price Index ('CPI') data supported expectations of an interest rate cut.10 Off-benchmark positions in medical device company Intuitive Surgical (ISRG) and biotechnology company United Therapeutics (UTHR) appeared among the top contributors over the period in response to the signal of a more favorable financing environment.
Targeted therapies have emerged as an area for development, with biotechnology companies pioneering antibody treatments seeing positive returns. A private, off-benchmark investment in Numab Therapeutics was the top contributor to performance. The Swiss biotechnology company’s lead asset, an exploratory antibody skin disease treatment, was acquired by pharmaceutical giant Johnson & Johnson (JNJ) for $1.3bn.11 Similarly, an overweight position in clinical-stage immuno-oncology company Merus (MRUS) was another top contributor to returns as the company presented positive clinical trial data for an antibody therapy treating head and neck cancer.12
An off-benchmark position in Amgen also contributed to active returns. The biopharmaceutical giant’s stock rose after the company advanced its GLP-1 medication to a late-stage clinical trial. Amgen aims to create an injectable version of the drug that blocks a different stomach hormone than currently available treatments, potentially prompting quicker weight loss if successful.13
Detractors from Performance*
Contrastingly, negative clinical trial data caused select biotechnology companies to decline. An off-benchmark position in Immunocore (IMCR) was the top detractor from performance as the company’s experimental melanoma treatment showed to be less effective than expected.14 An off-benchmark position in Neurogene (NGNE) was another detractor from performance. The company’s stock declined after a direct competitor, Taysha (TSHA), reported disappointing clinical trial results for its neurological therapy treating Rett Syndrome, which decreased market sentiment.15
Additionally, muted demand from budget-constrained biotechnology firms weighed on laboratory equipment manufacturers. Off-benchmark positions in Sartorius (OTCPK:SARTF) and Charles River Laboratories (CRL) detracted from performance as both companies experienced revenue declines due to reduced demand compared to COVID-19 peak levels and a restrictive funding environment for clients.16,17
Finally, an overweight position in Cabaletta Bio (CABA) detracted from performance as market participants seemed to source capital from the biotechnology stock following a strong run earlier in the year when the FDA put a series of the company’s treatments on a fast track for regulatory approval, prompting the stock to surge.18
BMEZ performance summary
1-Year | Since Inception (annualized) | Q2 2024 | ||
Total Return (NAV) | -0.6% | 4.0% | -4.4% | |
Total Return (Market Price) | 2.2% | 1.5% | -4.0% | |
MSCI ACWI SMID Growth Healthcare Call Overwrite Index | -0.7% | - * | -2.9% |
| Source: Morningstar and BlackRock as of 6/30/2024. The Trust’s inception was 1/29/2020. Returns are shown net of advisory fees paid by the Trust and net of the Trust’s operating fees and expenses. As of the Trust’s shareholder report dated 12/31/2023, the Trust’s gross expense ratio is 1.33%. Investors who purchase shares of the Trust through an investment adviser or other financial professional may separately pay a fee to that service provider. Past performance is not indicative of future results. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted, and numbers may reflect small variances due to rounding. Refer to BlackRock.com for current monthend performance. * MSCI ACWI SMID Growth Health Care Call Overwrite Index: An index representing the Healthcare sector stocks within the MSCI ACWI SMID Cap Growth Index. An index that captures mid and small-cap securities exhibiting overall growth style characteristics across 23 Developed Markets ('DM') and 24 Emerging Markets ('EM') countries. Indexes are unmanaged and index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. *The benchmark commenced on March 31, 2022 and therefore the benchmark does not have a Since Inception return. |
Investment Outlook
As we have reached the midpoint of 2024, we are encouraged to see the health care sector being rewarded for its earnings growth. Moreover, sector valuations are currently trading below long-term averages, failing to fully reflect the increasing pace of innovation and health care’s unique long-term drivers.19
We continue to invest in healthcare companies with compelling innovations within a variety of themes. Within oncology, the Trust is optimistic regarding the development of Antibody Drug Conjugates (ADCs), a targeted oncology treatment. The Team believes that this technology can improve outcomes for individuals suffering from certain cancers. Similarly, advances in minimally invasive procedures continue to enhance patient outcomes and may present attractive investment opportunities. The technology can enable smaller incisions and more rapid patient recovery times for neurosurgery, cancer surgery, and endovascular surgery, among others.
We expect continued market volatility, and we are encouraged by the health care sector’s relative resilience. We seek attractive opportunities in potential cash flow generating companies across all healthcare industries.
Over the long-term, secular drivers for the sector remain in place; firstly, aging demographics in both developed and developing countries and secondly, innovation in medical technology. The combination of these secular trends, with favorable valuation creates an attractive long-term investment opportunity.
Portfolio Positioning
During the quarter, we increased exposure to the biotechnology sub-sector, adding to companies with what we believe are robust product pipelines, particularly those exposed to GLP-1 demand. Elsewhere, we decreased our exposure to select names within the medical devices & supplies sub-sector that lacked near- term catalysts and sourced capital from select names within the pharmaceuticals sub-sector.
At the end of the period, the Trust held 45% of net asset value (“NAV”) in biotechnology, 32% in medical devices & supplies, 12% in health care providers & services, 7% in pharmaceuticals, and 1% in non-healthcare. These industry exposures were a result of bottom-up stock selection.
Option activity **
BMEZ Options | |
% of portfolio overwritten | 23.2% |
% out of the money | 3.8% |
Days average maturity | 53 Days |
The Trust utilizes an option writing (selling) strategy seeking to manage risk, generate current gains from options premiums, and enhance risk-adjusted returns.
The team maintained the call option writing strategy during the period. The option strategy employs a dynamic call writing process focused on single stocks to allow for the combination of cash flow and capital appreciation. These call options were typically written at prices above the prevailing market prices.
This includes using multiple option positions diversified across strike prices and expiration dates while taking into account changes in market conditions affecting option pricing.
The Trust continues to seek opportunities to generate option premiums during periods of heightened volatility.
| Footnotes * References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. BlackRock may or may not own the securities referenced and, if such securities are owned, no representation is being made that such securities will continue to be held. The holdings mentioned in the commentary represent the largest contributors and detractors to performance relative to the benchmark. They are not representative of all underlying investments made by the manager on behalf of the strategy, and it should not be assumed that the manager will invest in these investments or in comparable investments, or that any future investments made by the manager will be successful . To the extent that these investments prove to be profitable, it should notbe assumed that the strategy will be profitable or will be as profitable. ** Source: BlackRock as of 6/30/2024. Definitions:“% of portfolio overwritten:” Represents the amount of the portfolio represented by the notional value of covered call options. These options generate cash flow via a premium received, potentially offsetting the impact of a specific stock price drop.“% out of the money:” Represents the amount in which the option’s strike price is higher than the current market price. If a covered stock’s price rises above the strike price, it will limit the profitability of that holding to the amount of that strike price.“Average Maturity:” The average length of the option contracts in the Trust. 1Returns are shown net of advisory fees paid by the Trust and net of the Trust’s operating fees and expenses. Investors who purchase shares of the Trust through an investment adviser or other financial professional may separately pay a fee to that service provider. Past performance is not indicative of future results. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted, and numbers may reflect small variances due to rounding. Refer to BlackRock.com for current month end performance. 2BioSpace 05/15/24 3FiercePharma 06/25/24 4BioPharma Dive 04/30/24 5Bloomberg 06/24/24 6CNBC 06/17/24 7FierceBiotech 04/18/24 8Merck 05/29/24 9Boston Scientific 06/18/24 10Forbes 06/24/24 11Johnson & Johnson 05/28/24 12Merus 05/28/24 13Yahoo Finance 05/03/24 14BioPharma Dive 05/23/24 15BioSpace 02/28/23 16Morningstar 07/19/2024 17Yahoo Finance 05/02/2024 18Cabaletta Bio 01/08/2024 19BlackRock Risk and Quantitative Analysis, FactSet 06/30/24 |
This post originally appeared on BlackRock
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