By: Dividend Sensei
Jeff Jonas of Gabelli talks about a closed-end fund that invests in the health-care and consumer staples sectors
A 5% yield is difficult to come by these days, even if income is your only objective. But the Gabelli Healthcare and Wellness Trust has a distribution yield above 5% and also pursues long-term growth.
Jeff Jonas, who co-manages the fund, described his investment strategy and spoke about several representative stocks in an interview.
Seeking higher yields
The fund seeks long-term growth while paying a high dividend, which may make it appealing for those without pensions in retirement.
But where do you shop for yield? Yields on 10-year U.S. Treasury notesTMUBMUSD10Y, -1.29% are less than 2.6%. If you look at preferred stocks with (low) investment-grade ratings, you will probably have to pay a premium for paper yielding 5% or more. Or you could take more risk and go for high-yield (junk) bonds — the SPDR Bloomberg Barclays High Yield Bond ETF JNK, +0.06% has an SEC yield of 5.85%.
But none of those options offer any potential for growing your investment while paying you dividends.
A closed-end fund
The main objective of the $194 million Gabelli Healthcare and Wellness TrustGRX, +0.44% is long-term growth; however, providing income is a “big objective” as well, Jonas said during an interview. The fund’s distribution yield (based on the share price) is 5.38%, according to Morningstar. The dividend is paid quarterly and has been “generally growing over time,” Jonas said.
Unlike a traditional open-ended mutual fund, a closed-end fund has a fixed number of shares that are traded publicly. An open-ended fund’s share price is its net asset value (NAV), calculated by dividing the market value of its holdings by the number of shares at the market close each day. A closed-end fund has an NAV as well, but its share price may higher or lower.
So an advantage of a closed-end fund to a portfolio manager is that he or she has “permanent capital” to invest. The manager doesn’t have to deal with a continual inflow or outflow of money that needs to be invested, or in the case of an outflow, make painful decisions about which investments to sell immediately. If a closed-end fund decides to expand, typically it will make a rights offering to current shareholders; they will be offered a discounted price to buy enough new shares to maintain their ownership percentage of the fund.
To enhance the yield, the Gabelli fund has employed leverage by issuing its own preferred shares.
Health and wellness thesis
When asked why a sector-specific focus on health care might work out well for long-term investors, Jonas cited two trends: “We see are growth in health-care spending (twice as fast as GDP) driven by an aging population and emerging markets spending more on the health of their citizens, and people taking better control over the own health through better exercise and nutrition.”
So the fund is focused on the health-care and the consumer staples sectors, and it is not concentrated, holding 122 stocks as of Dec. 31. The 10 largest positions are listed below.
Jonas said Gabelli has a team of 50 analysts conducting bottom-up research to select stocks, and that the Healthcare and Wellness Trust has a value focus. “We always try to meet with companies directly,” he said.
Jonas talked about three stocks held by the fund.
The top holding of the fund as of the end of 2018 was Abbott LaboratoriesABT, +1.23% which makes medical devices, diagnostic equipment, generic drugs and nutritional products.
“They have great exposure to emerging markets, which over the long term will grow faster than developed markets like the U.S.,” Jonas said. He added that most of the company’s growth in emerging markets has been organic: “They have been around for decades and have spent a ton of time building that reach.”
The stock’s dividend yield is 1.65%, which isn’t particularly high (the dividend yield for the S&P 500 index SPX, +0.20% according to FactSet). However, Abbott is included in the S&P 500 Dividend Aristocrats Index SPDAUDP, +0.32% which means it has increased its regular dividend for at least 25 straight years. Jonas expects Abbott to continue to increase the payout in line with earnings increases.
“They have a lot of interesting medical-device technology coming to market right now. There is a product called MitraClip — it repairs one of the valves in your heart. They cameo ut with great clinical data that will expand greatly the usage of this product,” Jonas said.
Nevro Corp. NVR, +1.20% is a much smaller company than Abbott, with a market capitalization of $2 billion. The company’s sole product is the Senza spinal cord neurostimulator, which uses low doses of electricity to fight chronic pain. The third generation will come out at the end of the year.
Back surgery isn’t always successful, and pain management “is usually a treatment of last resort,” Jonas said.
While 2018 was a “tough year” for the company, Jonas is betting on new CEO Keith Grossman’s track record. Grossman “has been with several medical device companies, has done several turnarounds and tends to sell the company after he turns it around,” Jonas said.
Abbott also makes neurostimulators, and therefore competes with Nevro. “It is a very healthy market growing in double digits right now,” Jonas said.
Jonas described Alexion Pharmaceuticals ALXN, -0.17% as “another turnaround story.” The company was pretty much dependent on one drug, Soliris (a treatment for paroxysmal nocturnal hemoglobinuria), before making what he called “some bad acquisitions to try to build out the pipeline.”
A combination of overpaying for acquisitions and lower-than-expected sales of new products led to a change of management, with Ludwig Hantson taking over as CEO in March 2017, after he led the sale of Baxalta to Shire in June 2016.
Under Hantson’s leadership, Alexion “has done a couple of tuck-in acquisitions to rebuild the R&D pipeline,” generally paying “reasonable prices for drugs that look like they have a good shot at success,” Jonas said.
“Their original drug Soliris is being updated to a new drug called Ultomiris. It is more convenient for patients. It is infused less frequently and they are actually pricing it a little bit cheaper, which is kind of rare in the pharma world,” he said.
American depositary receipts of Shire PLC were the sixth largest holding of the Gabelli Healthcare and Wellness Trust as of Dec. 31. Shire was acquired by Takeda Pharmaceutical TKPHF, -2.37% on Jan. 7. (You can read more about Takeda and an opportunity for investors brought about by the Shire deal here.) So excluding those two companies, here are the fund’s 10 largest holdings as of Dec. 31:
|Company||Ticker||% of fund||Total Return – 2019 through April 12||Total Return – 3 Years||Total Return – 5 Years|
|Abbott Laboratories||ABT, +1.23%||2.7%||9%||95%||134%|
|Kikkoman Corp.||2801, -1.48%||2.4%||-9%||57%||199%|
|Thermo Fisher Scientific Inc.||TMO, +0.97%||2.3%||25%||99%||147%|
|Merck & Co.||MRK, -0.74%||2.3%||5%||57%||66%|
|Johnson & Johnson||JNJ, -0.75%||2.2%||6%||34%||61%|
|Nestlé SA||NESN, +0.19%||2.1%||20%||45%||65%|
|CVS Health Corp.||CVS, +0.40%||2.0%||-19%||-44%||-19%|
|Yakult Honsha Co.||2267, -0.54%||1.8%||-5%||45%||52%|
|Post Holdings Inc.||POST, +1.05%||1.8%||24%||59%||115%|
|Danone SA||BN, +1.15%||1.8%||13%||23%||50%|
|Sources: Morningstar Direct, FactSet|
Gabelli Healthcare and Wellness Trust is rated three stars (out of five) by Morningstar. Jonas believes that Morningstar isn’t considering the fund’s performance “correctly” because it should use a different benchmark.
So here are two sets of performance comparisons. The first is from Morningstar — the fund’s total return (based on the share price, not NAV, and dividends), its Morningstar category and the MSCI All Countries World index (in U.S. dollars through April 12:
|Total Return – YTD||Avg. return – 3 years||Avg. return – 5 years||Avg. Return – 10 years|
|Gabelli Healthcare and Wellness Trust||14.3%||6.8%||6.7%||14.7%|
|Morningstar Healthcare Equity category||12.4%||7.2%||8.1%||16.7%|
|MSCI All Countries World Index (U.S. dollars)||15.1%||11.7%||7.3%||11.5%|
|Source: Morningstar Direct|
The Gabelli team believes it would be more fair to compare the fund’s performance with a 50-50 combination of the S&P 500 Health Care IndexGSPA, +0.15% and the S&P 500 Consumer Staples Index GSPS, +0.17% . Here’s Gabelli’s own performance comparison, again based on share price and dividends, through the end of 2018:
|Avg. return – 3 years||Avg. return – 5 years||Avg. Return – 10 years|
|Gabelli Healthcare and Wellness Trust||1.7%||3.7%||12.8%|
|Blend of S&P 500 Health Care and Consumer Staples indexes||5.6%||8.7%||12.8%|
|S&P 500 Health Care Index||8.1%||11.1%||14.7%|
|S&P 500 Consumer Staples Index||3.1%||6.3%||11.0%|
|S&P 500 index||9.3%||8.5%||13.1%|
|Source: Gabelli Funds|
The fund’s total return has been competitive for the 10-year period while lagging for the shorter periods. Then again, the relatively high dividends may have made the wait relatively easy for income-seeking investors.
Jonas said: “We tend to invest on the more defensive side of the spectrum and often our outperformance comes from protecting capital in down markets. That fits within our value investing style, although unfortunately value investing has been very out of favor for the last 5-plus years, lagging both the broader market and growth investing styles.”
The value focus also means the fund will have less exposure to riskier health-care subsectors such as biotechnology.
“As we get later into this economic cycle, we think individual stock selection will become more important rather than just hugging an index. We’re already seeing more volatility and more dispersion in individual stock returns,” Jonas said.
“We also appear to be in a golden age of financial engineering — mergers, spinoffs and other corporate actions — which is an environment we thrive in,” he said.