Summary
- THQ is a fund that focuses on investments in the healthcare sector.
- The fund sports a distribution rate of 7.64%, well above its ETF equivalent XLV with a 1.6% yield.
- THQ trades at a wide discount of 8.46%, offering an attractive entry point while waiting for a rebound in the sector.
- Looking for a portfolio of ideas like this one? Members of CEF/ETF Income Laboratory get exclusive access to our model portfolio. Start your free trial today »
Tekla Healthcare Opportunities Fund (THQ) has been lagging the broader market's returns as measured by the SPDR S&P 500 ETF (SPY). However, on a year-to-date basis, THQ has been beating its ETF equivalent. Overall, the health care sector has been left behind the broader market's ~20% rally for the year. This has a lot to do with the U.S. presidential campaigning season ramping up. I believe with THQ's discount, active management and depressed sector, we are set to see a rebound.
THQ describes its strategy as "a versatile growth and income investment strategy investing across all healthcare sub-sectors and across a company's full capital structure." This leaves the fund managers with a broad range of investment options. The flexibility allows them to move money where they see the potential for higher returns. The fund also employs an options strategy. The covered calls written on some of the securities in the portfolio can potentially allow for additional income in the form of premiums received. Covered call writing is seen as a slightly defensive strategy and has actually helped the fund this year.
In addition to the fund utilizing options, the fund also employs leverage. Currently, leverage is about 22.30% of total managed assets. Total managed assets are sitting at $1,022.327 million. The expense ratio for the fund, as of its last report, was 1.49%. When including the leverage expense, this climbs to 2.40%. The 1.49% isn't unreasonable, given the more active management. Still, it is slightly above average for CEFs, in my opinion.
Performance
As previously mentioned, it is the U.S. presidential campaigning season. With rhetoric abound by both parties in the U.S., healthcare hasn't escaped the ire. This has put the healthcare sector under pressure due to uncertainty. Even the current sitting administration has been critical on parts of healthcare. The primary focus is on pharmaceutical prices and health insurance companies. However, as of late, there was some relief for the pharma companies as Trump dropped a drug-pricing proposal. The major focus has then shifted to the insurance companies. This focus stems from the "Medicare for All" and other regulatory proposals from the Democratic front runners. In my opinion, though, this is all political talk as we get closer to 2020. This is where I believe THQ stands a good chance of a rebound, potentially later next year as we get closer to voting and have a more clear picture of the front runners. I would just rather be buying shares now before they make significant moves higher.
Currently, shares of THQ can be picked up for $17.64 per share. This can be compared to its NAV per share amount of $19.27. This then gives us our discount on the fund of 8.46%. This has narrowed since the 9.49% discount when I previously covered the fund.
(Source - CEFConnect)
In this chart, we can see that since inception the fund has carried a steep discount. However, I believe this can be linked to the fact that the overall market was not great in 2015 and the current U.S. administration took office on January 20, 2017. So again, the fund was hit with rhetoric at that point. Trump has kept the pressure on the healthcare sector since he was campaigning. Although, in the end, no significant change has hit the sector yet.
The fund's 1-year average discount is also a bit wider than we are at currently, coming in at 9.83%. This does give us a 1-year z-score of 1.3. This gives us an indication that THQ is trading higher relative to its historical range. Even the fund's 3-year average is a 9.20% discount. But again, I believe this is due to Trump's constant bashing of the sector and now increasing rhetoric from the Democrats too.
Overall, I believe that THQ has been showing relatively strong performance. YTD, the fund is showing a total return of 10.15% on a market basis, and a NAV total return of 9.06%. This can be compared to its equivalent ETF, Health Care Select Sector SPDR (XLV). XLV is showing YTD returns of 7.42%, and a total NAV return of 7.51%. It wouldn't be fair not to mention though, in the prior years XLV has outperformed THQ.
