• As investors rotated to other sectors, healthcare had a relatively weak month. The continued US dollar sell-off further impacted the healthcare sector. Managed care was especially pressured by a potential lower-than-expected reimbursement rate notice from the Centres for Medicare and Medicaid Services (CMS).
• The fund had a negative monthly performance, with pharmaceuticals and managed care (despite the sub-sector’s overall weakness) being the sole positive contributors. Biotechnology was the largest detractor amid limited M&A activity.
• In our view valuations and growth outlook for 2026 remain solid for the sector, with multiple upcoming important product launches and data read-outs.

Monthly comment

To start the year, equities saw a rotation toward energy, cyclicals and materials (including gold and silver), whereas the first earnings reports mostly pressured the financial services and technology sectors. A US dollar sell-off was sparked by geopolitical and trade uncertainty from Trump’s Greenland-linked tariff threats. The healthcare sector had a relatively weak month as momentum shifted elsewhere; the sector was further impacted by the flight from the US dollar given healthcare’s US-centric revenue base.

A cautious but constructive start for healthcare

As usual, the year kicked off with the J.P. Morgan (JPM) healthcare conference where companies primarily gather and outline their strategies. Reassuring updates were given on both ongoing key commercial launches, and future areas of growth and innovation. Although several smaller deals were announced during the week, the stock market initially reacted negatively to the lack of larger acquisitions.

Moreover, the Centers for Medicare & Medicaid Services (CMS) announced that it would only increase Medicare Advantage (MA) reimbursement for 2027 by 0.1 percent, excluding plan coding improvement. This came in well below expectations of the 4 to 5 percent increase most market participants were expecting.

The managed care sector was severely impacted negatively by the news, with the S&P Managed Care Index having its single-worst day since 1997, falling by over 18 percent. For the full month, the Index was down by 11 percent.

As for other healthcare sub-sectors, only a handful of companies reported in January. Most investor attention was given to 2026 guidance which was, on average, in-line with expectations. In addition, companies did not expect material impact on future earnings from either reduced federal funding or pricing pressures from Most Favored Nation (MFN) or the Inflation Reduction Act. By month’s end, nearly all the large pharmaceutical companies had reached an MFN agreement with the White House.

As for individual products, the highly-anticipated launch of Novo Nordisk’s oral Wegovy reported strong early uptake numbers, and similar positive sales numbers were seen for new important launches in severe respiratory diseases.

Hawk at the Fed’s helm?

Trump nominated Kevin Warsh to succeed Jerome Powell as the new Federal Reserve Chair. Stock markets initially reacted with caution as Warsh is considered to have a more hawkish profile, despite advocating further rate cuts. Accordingly, treasury yields ticked up slightly on the news. However, the longer-term monetary direction (and market reaction) remains to be seen as Warsh is also regarded as being more independent from President Trump than alternative candidates.

Reflections

January was a challenging month for the fund, initially sparked by the lack of large business deals during the JPM conference. Several of the late-stage biotech positions suffered from this deal paucity. Albeit frustrating, we believe this setback is temporary as these companies continue to be high-quality companies with rapidly progressing pipelines.

The policy overhang, real or perceived, has prevented broad, generalist, investor engagement. So how should one interpret the sentiment for healthcare going forward? Fundamentally, we still argue that conditions for the sector remain solid. To exemplify, the pharma group still trades at 30 percent lower relative to the valuation of the S&P500, despite the rebound from near all-time low levels in the fall of 2025. Generalist investors’ allocation to healthcare during the recent rebound was likely driven by short covering, leaving substantial further upside as conviction in fundamentals returns.

This, of course, begs the next question of whether the fundamentals truly support higher valuations. From our vantage point, we see several reasons for solid growth and earnings potential into 2030.

Increased visibility and progressing innovation pipelines

From our management interactions at the JPM conference, we noted a constructive shift in tone from many companies. Larger pharmaceutical companies have gained more clarity since striking MFN deals with the White House, and tariff risks to medical technology appear to have abated. This has already resulted in sharper 2026 guidance for those companies having reported. The relative absence of larger M&A deals during JPM should not distract from the improved funding environment for biotechnology companies seen during the past months.

In the end, commercial uptake is the ultimate litmus test for willingness to adopt innovation. Ongoing strong launches in growing disease areas such as respiratory diseases, bronchiectasis, and genetic cardiovascular diseases reassure us here; the previously mentioned oral Wegovy launch being another example.

We also continue to see a wave of innovation reaching the market, both in the near- and in the long term, and although the bar for commercial success may have been slightly raised by regulatory and payor dynamics, we continue to see significant investment opportunities in companies and products truly addressing unmet medical needs. In 2026, we will see several important data read-outs, including for treatment-resistant high blood pressure/cholesterol and breast cancer. Should they be positive, each of these new treatment classes could drive massive value in establishing themselves as future pillars of disease management in large patient populations.

Regarding the managed care reimbursement update, the Medicare Advantage (MA) rate notice remains preliminary and may be revised upward when finalized in April. Additionally, the proposal may face internal resistance amid political reluctance to reduce benefits for a key voting demographic in an election year. At the same time, recent anti-insurer rhetoric and broader federal budget constraints may limit higher final reimbursement rates, which would likely result in benefit reductions.

To conclude, we believe that the sector has attractive valuations and a positive growth outlook for the year. The ongoing reporting season will provide further clarity on these matters. In addition, we look forward to several significant product launches and new trial read-outs expected in the near future.