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Business Report Development of investment solutions

Development of investment solutions

Central banks had a big impact on financial markets in 2023. Higher interest rates and signs of slowing economic activity kept investors on guard. The «higher for longer» mantra for interest rates began to resonate less during the second half of the year, ushering in strong gains for both equities and bonds. Several Bellevue strategies have already benefited from these tailwinds and others are well positioned for performance in 2024.

2023 was quite an eventful year for global financial markets, and rather challenging for investors, too. The collapse of Silicon Valley Bank sent tremors through the market already in March. That was followed by the demise of the once-prestigious Swiss big bank Credit Suisse. Meanwhile growing investor enthusiasm for artificial intelligence (AI) and its potentially growth-boosting impact led to big gains for a few big tech companies. Statements from the US Federal Reserve that it would keep its rates high for longer to fight inflation triggered a sharp correction in the bond market from the summer on; yields on 10-year US Treasuries rose above the 5% mark for the first time since the global financial crisis in 2007. As the year ended several asset classes staged a strong rally, fueled primarily by falling inflation and the general expectation that central banks would engineer a soft landing. There was a growing conviction that interest rates had probably reached their peak, i.e. that the monetary policy reins were tight enough to bring inflation under control. This was also signaled by US Fed Fund futures, which reflect market expectations about the future course of the Fed's monetary policy.

Source: Bloomberg, Bellevue Group, as of December 31, 2023

Broad-based equity indexes such as S&P 500 (+14.9%), the Stoxx Europe 600 (+8.9%) and the SPI (+6.1%) closed the year with good gains. The strong performance of the US market in 2023 pales when measured instead by the S&P 500 Equal Weight Index (+3.6%), which is an equal-weighted version of the cap-weighted S&P 500. At one point the «Magnificent Seven» accounted for more than 90% of the S&P 500’s total return last year. Looking at sector returns at the global level, tech (+38.6%), communication services (+31.1%) and consumer cyclicals (+21.6%) were the top performers, while healthcare (–6.8%), consumer staples (–8.9%), energy (–9.6%) and utilities (–11.3%) brought up the rear. All performance data is in CHF.

Healthcare – not the primary focus of investors in 2023, with only a few exceptions

The overall performance of healthcare stocks in 2023 was disappointing. To some extent, this is attributable to the fact that sales growth at many sector companies fell back to more normal levels after surging during the pandemic. These swings were quite pronounced at high-profile companies such as Roche, Thermo Fisher and Moderna. The steep rise in interest rates posed another big challenge, particularly for the biotech sector and digital health players. Companies that had not yet passed the breakeven point were confronted with a higher equity risk premium. Meanwhile the results of GLP-1 studies propelled the shares of the two global heavyweights Eli Lilly and Novo Nordisk to higher ground.

*     Launched as of November 30, 2023
**   Realigned as of November 30, 2023
Source: Bellevue Group, as at December 31, 2023

BB Biotech’s NAV advanced 1.8% in USD during the year under review (NBI +4.6%). Its share price ended the year down 10.1% and the share premium receded to 0.9% at year-end 2023 from 12.6% a year earlier. Looking at the returns of the largest positions in the portfolio, Vertex, Intra-Cellular and Ionis made the strongest performance contributions, while Moderna, Sage Therapeutics and Incyte were the weakest. Shares of the Bellevue Healthcare Trust Fund closed the year 12.8% higher and ranked among the top-performing healthcare strategies in its peer group, reversing a period of extended volatility thanks to its strong performance in Q4.

With a gain of 5.2% for the year, Bellevue Medtech & Services outperformed the broad healthcare sector (MSCI World Healthcare +3.8%). The fund's performance took a hit after Novo Nordisk published trial results for its weight-loss drug Wegovy (GLP-1 drug). The data showed that patients who had preexisting cardiovascular disease experienced a 20% reduction in major adverse cardiovascular events such as heart attacks and strokes after treatment with Wegovy. This news triggered a sell-off in the stocks of cardiology and orthopedics companies, and growth stocks in the diabetes space also suffered big losses. After detailed trial data was published in November indicating that GLP-1 drugs might have an only marginal impact on the business of medical technology companies in the mid to long term, these same stocks staged a rebound as the year came to end.

The Digital Health Fund’s strong performance in December (+14.2%) is a good sign that digital health companies have turned the corner after a prolonged period of weakness. Digital health stocks thus ended the year well off their lows. Leading digital health companies continued to report very solid growth rates in 2023 and made considerable progress towards their strategic goals, but this positive news was overshadowed by a prolonged and steep contraction in valuations, which resulted in the fund’s unsatisfactory performance of –4.1% for the year.

In August Chinese officials intensified their crackdown on corruption in the country’s healthcare system. Hundreds of hospital directors and pharma managers are now under investigation. The generally good earnings announcements have shown, however, that the anti-corruption campaign has not slowed the growth of Chinese healthcare companies offering top-quality products and services. Nevertheless, the anti-corruption headlines weighed on the performance of equity strategies with emerging market exposure, including Bellevue Sustainable Healthcare (–1.4%), Bellevue Healthcare Strategy (–2.3%), Bellevue Asia Pacific Healthcare (–7.2%) and Bellevue Emerging Markets Healthcare (–7.6%).

At the J.P. Morgan Conference held in San Francisco early in 2024, several companies issued positive statements about the current fiscal year, which can often be traced to the approval and launch of relevant new products. Acquisition activity has picked up considerably, and the tepid growth outlook for the world economy could actually benefit non-cyclical sectors such as healthcare.

As a «House of Healthcare Investment Ideas», we pride ourselves on offering our clients access to mega trends as early as possible through the most efficient and effective means possible. At the end of November 2023, Bellevue launched two new funds, Bellevue AI Health and Bellevue Obesity Solutions, to specifically address the investment themes of AI healthcare and the obesity pandemic with actively managed equity funds.

Regional strategies and multi-asset solutions – a broad-based comeback

After giving up ground in 2022, both the equity and the bond market recovered in 2023. That led to positive returns for multi-asset funds as well, in contrast to 2022, when they were unable to benefit from the typical diversification effects these two asset classes offer. Compared to the US stock market, which is dominated by the «Magnificent Seven», the positive performance of Swiss and European equities in 2023 was clearly more broadly based. The equity strategies Bellevue Entrepreneur Europe Small (+17.0%) and Bellevue Sustainable Entrepreneur Europe (+10.5%) performed well, delivering double-digit returns (in EUR). Small-cap stocks in particular were back in favor. The Swiss-focused equity strategies Bellevue Entrepreneur Switzerland (+8.6%) and Bellevue Entrepreneur Swiss Small & Mid (+5.9%) also generated positive returns but were unable to match the returns of their European sister funds in CHF.

European small- and mid-cap stocks are still inexpensive and they stand to benefit from a more benign interest rate environment. Besides the future course of interest rates, there are other factors that could trigger a good performance and a valuation re-rating in the small and mid-cap space, namely 1) the slow economic recovery in China, 2) the gradual end to the global destocking trend, and 3) Europe is likely to display better economic momentum than the US economy, where growth is leveling off, which should benefit export-oriented Swiss small and mid caps as well.

* Only related to liquid investment strategies (excl. Private Equity)
** Transferred to Bellevue Emerging Market Healthcare in Q1 2024
Source: Bellevue Group, as at December 31, 2023

Bellevue African Opportunities (–6.1% in USD) continued to face a challenging environment, particularly after war broke out between Hamas and Israel. Foreign investors in Egypt have been unable to repatriate their foreign assets via official foreign exchange channels for several months, so we decided to exit the Egyptian stock market.

The Bellevue Global Macro Fund ended the year with a gain of 8.5% (in EUR) thanks to the excellent performance of bond and equity markets in November and December. Every asset class in its portfolio made a positive contribution to its performance. The StarCapital Multi Income Fund closed the year with a positive return of 5.2%. The fixed income strategies Bellevue Global Income (+5.3%) and StarCapital Dynamic Bonds (+7.8%) ended the year in the green as well and outperformed the Bloomberg Global Aggregate EUR Hedged Index (+4.7%).

The Bellevue Option Premium Fund, a volatility-driven strategy, proved to be a valuable complement to a core investment portfolio. With a full-year return of 11.4% (in EUR), this product delivered a convincing performance, also in comparison with its peer group, and profiled itself as a successful diversification strategy.

Private Markets – focus on SME growth investments

Bellevue Private Markets has maintained its focus on its core business of providing growth financing to SMEs in the DACH region. Despite the volatile macroeconomic situation and geopolitical tension, attractive new investments were made during the course of 2023, and lucrative partial exits were successfully completed as well..

With adbodmer AG’s exclusive group of investors and Bellevue Entrepreneur Private LPCI («LPCI») – our specialist investment company – Bellevue can muster significant financial resources and it has a broad and deep pool of entrepreneurial experience and collective know-how as well as an extensive and valuable business network at its disposal. This knowledge and capability are also appreciated and valued by both existing and potential investment targets.

Bellevue adbodmer continues to focus its deal sourcing on key themes and trends such as e-mobility, in order to capture growth opportunities with the least sensitivity to business cycles.

As an example, the adbodmer investor group and LPCI increased their stake in an Austrian SME by participating in a capital increase during the second half of 2023. Since the initial investment made in 2022, the company – which produces high-performance wires and cables for engines and power units in EV, among other products – has seen a significant improvement in its order intake. Within less than a year, additional capex was needed to expand the production capacity of the company, which is the leading high-tech supplier in this field, so it can profit even more from the market's explosive growth.

LPCI’s existing portfolio companies displayed pleasing operational developments considering the challenging environment. At some companies, the pendulum swung back to more normal levels in the wake of the pandemic. Whereas inventory buildup was still widespread in 2022 (due to worries about further global supply chain disruptions) and helped to fuel sales growth, destocking activity among business customers was observed by a few portfolio companies in 2023. Declining consumer confidence was also increasingly noticed as the year progressed. However, thanks to strict cost management and flexible cost structures, most of the portfolio companies were able to cushion the impact of the above-mentioned trends. Several companies continued to grow despite the difficult environment and even managed to generate significantly higher earnings.

Bellevue adbodmer's strategic focus on companies with very solid financials and low levels of debt served the company well given the volatile environment. It also enabled some very successful partial exits in 2023, despite the general contraction in direct private equity valuations. Adverse market headwinds have sharpened the market’s focus on reliable and profitable revenue streams, which is further confirmation of our strategic focus on solidly funded champions operating in niche markets.

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