Stockholm (HedgeNordic) – The largest equity hedge fund in the Nordics with assets under management just shy of $1 billion, the Rhenman healthcare fund, is only months away from celebrating its 15-year anniversary. Employing a long-biased equity strategy in the healthcare sector, the fund steered by founder and CIO Henrik Rhenman has achieved an annualized return of about 17 percent since its inception. Having undergone a generational shift within both the portfolio management and operational teams, the healthcare-focused fund remains steadfast in its pursuit of capitalizing on the continued growth of the healthcare industry.

“It has been an exciting journey, to say the least. The early days were quite nerve-wracking though, to be honest,” Henrik Rhenman, the founder and CIO of Rhenman & Partners, reflects on the early days of the fund. “When we launched the fund back in 2009, we were still in the middle of the global financial crisis, the healthcare sector was out of favor and we saw a lot of volatility in those first few years,” he recalls. Yet, navigating through periods when the sector falls out of favor is an integral aspect of Rhenman’s long-term investment approach. “We are long-term investors, so we need to be tolerant during volatile times.”

“It has been an exciting journey, to say the least. The early days were quite nerve-wracking though, to be honest.”

Henrik Rhenman

Generational Shift and Sector Expertise

Rhenman & Partners has undergone a transformation in recent years, characterized by what Rhenman terms a “generational shift.” Teresa Isele assumed the role of CEO last year, bringing valuable expertise and injecting fresh energy into the team. “Teresa Isele has been a great addition to the team, and we are in a very exciting phase with lots of plans for the future,” notes Rhenman. The portfolio management team has also seen an infusion of new talent. Consisting of four members, the investment team operates under Henrik Rhenman’s oversight, who directs overall strategy and asset allocation and has the final say on all investment decisions. He collaborates with three portfolio managers – Kaspar Hållsten, Hugo Schmidt, and Amennai Beyeen.

The healthcare industry presents a multifaceted landscape for investors, with numerous sub-sectors requiring specialist knowledge to understand growth drivers and long-term prospects. “Although we operate within a specific sector, the company universe we cover is broad and complex,” Teresa Isele explains the rationale behind the sector focus of the investment team. “To ensure we are in a position to analyze the different areas of the healthcare sector, the team has been structured around the four main subsectors,” she elaborates. Each member of the investment team specializes in a distinct area, with Amennai Beyeen concentrating on biotechnology and pharmaceuticals, Hugo Schmidt on healthcare services, and Kaspar Hållsten on medical technologies.

“Although we operate within a specific sector, the company universe we cover is broad and complex.”

Teresa Isele

“The complexity of the healthcare sector is at an all-time high, and a laser-focused approach within its various subsectors is a necessity,” reiterates Kaspar Hållsten, a member of Rhenman & Partners since 2017. “The healthcare sub-sectors are highly disparate, with distinct and dissimilar characteristics,” he emphasizes. “This is what creates the need for specialization in respective sub-sectors.”

Formidable Force and Innovation

Adopting a bird’s-eye view of the industry, Hållsten underscores that “healthcare has expanded and has become a formidable force in the global economy.” The sector is one of the largest in the world, following closely behind information technology and financials. “The continued expansion of the sector will be fueled by megatrends, such as an aging global population, escalating medical needs, and an increase in healthcare expenditures,” predicts the portfolio manager. “We believe these trends should provide sustainable future growth for the sector.” Despite challenges such as access, affordability, and maintaining high-quality care, when viewed collectively, “these megatrends and challenges provide opportunities for us, as specialized healthcare investors, to find the disruptors and winners.”

“Healthcare has expanded and has become a formidable force in the global economy. The continued expansion of the sector will be fueled by megatrends…”

Kaspar Hållsten

“World demographics will continue to increase the rate of chronic diseases and obesity,” Hugo Schmidt reflects on the long-term factors influencing the healthcare industry. “Countries tend to spend more on healthcare the richer they get, in both absolute and relative terms, which should continue to be a tailwind for the sector,” he echoes Hållsten’s sentiment. New technologies and therapies will continue to solve unmet needs, considers Schmidt. While scientific innovation has been driving healthcare advancements for decades, the technological revolution in healthcare is still in its early stages. “Precision medicine, the rise of cell and gene therapies, robotic surgery and care models influenced by artificial intelligence are among the areas that we are excited about,” notes Schmidt.

“The sector has for a long time shown a remarkable ability to identify new treatments and solutions to improve quality of life for patients. We see many signs that this will continue.”

Amennai Beyeen

“The sector has for a long time shown a remarkable ability to identify new treatments and solutions to improve quality of life for patients,” highlights Amennai Beyeen, who spent 12 years at global healthcare company Novartis before joining Rhenman & Partners. “We see many signs that this will continue,” he emphasizes. “Right from the start, our focus has been on innovation. This means we have been particularly fond of the biotech segment with many small and mid-cap companies,” points out Henrik Rhenman. “Apart from exciting medical breakthroughs and strong financial results from many of these holdings, we have had more than 50 acquisitions in the fund – this is something we are pleased about.”

Sector Allocation

Rhenman’s healthcare fund maintains a highly diversified portfolio comprising about 100 holdings. However, a select dozen ‘high conviction’ ideas constitute around 40 percent of its long exposure, with the fund’s more diversified ‘core holdings’ bucket accounting for similar exposure. “To achieve superior results, we must be comfortable with taking concentrated bets where we have high conviction,” emphasizes Henrik Rhenman. Additionally, the fund maintains a diverse pool of fractional positions, ranging from 0.5 percent to one percent in portfolio weight, alongside a selection of candidate holdings. 

“High conviction holdings rarely have binary outcomes, whereas fractional positions are by nature stocks with higher risk and potential reward,” explains Beyeen. “We believe that our specialized knowledge of the sector makes us well positioned to assess, manage and take risk in both early and more mature companies.” This specialized sector expertise also informs Rhenman’s allocation decisions among sub-sectors. “Profit momentum, regulatory considerations and the perception of the stock markets participants risk sentiment are all factors that influence the sub-sector exposure decisions,” elaborates Kaspar Hållsten. Historically, biotechnology has dominated the fund’s allocation.  However, the more restrained macroeconomic environment in recent years led to a reduction in the allocation to this sub-sector.

“In the near term, interest rate policy will naturally influence the performance of healthcare stocks, particularly in the biotechnology sector, as their ability to secure external financing is dependent upon economic conditions.”

Hugo Schmidt

Indeed, there is a myriad of macroeconomic and non-macroeconomic factors impacting the pricing dynamics of healthcare stocks. “In the near term, interest rate policy will naturally influence the performance of healthcare stocks, particularly in the biotechnology sector, as their ability to secure external financing is dependent upon economic conditions,” argues Hugo Schmidt. “We would be amiss if we didn’t mention upcoming elections in the United States,” notes Schmidt. Given the dominance of the US market in the healthcare sector, healthcare policy changes and political leadership changes in the country are important for the sector. This election cycle, however, the political debate around the healthcare sector has been relatively subdued thus far.

Long-Term Prospects, Emerging Markets Exposure

However, these factors only represent short-term drivers of performance in the healthcare industry. Longer term, the healthcare industry exhibits promising potential, driven not only by trends in developed markets such as aging populations and technological advancements but also by the growing middle class and rising healthcare demand in emerging markets.

While the Rhenman fund allocates approximately 75 percent to the United States, and the remainder distributed across Europe and Asia, the fund is positioned to capitalize on the growth potential emanating from emerging markets. “Given that most companies in the US have broader exposure to emerging markets such as China, we believe we are in a good position to capitalize on that trend in the coming years,” argues Hållsten. “Today, we believe that the best way for the fund to get risk-adjusted exposure to emerging markets is through a careful selection of multinational companies.”

The outlook for the healthcare industry is promising, and Rhenman & Partners is well-positioned to capitalize on its potential. “We feel confident in our scientifically backed investment process,” concludes Beyeen. “The sector is ever-changing, and it is critical to keep pace with advances within the whole healthcare ecosystem.”

This advertorial is part of HedgeNordic’s Nordic Hedge Fund Industry Report.