The Interview - Henrik Rhenman and Carl Grevelius, Rhenman & Partners: "The most likely outcome of healthcare reform in the US is higher consumption"
Stockholm-based Rhenman & Partners Asset Management, a niche player focused on healthcare, has just launched Rhenman Healthcare Equity L/S, a global fund focused on pharmaceuticals, medical technology, biotechnology and healthcare services. Founding partners Henrik Rhenman and Carl Grevelius (pictured) explain their stock-picking investment process based mainly on analysis of newsflow relating to products
HW: What is the background to your company and fund?
CG: Rhenman & Partners Asset Management is an exciting niche player focused on the healthcare sector. The Stockholm-based firm was founded in 2008 by a group of senior industry executives with extensive asset management experience and an unprecedented track record in the sector. On June 22 we launched Rhenman Healthcare Equity L/S, a global healthcare fund focused on pharmaceuticals, medical technology, biotechnology and healthcare services.
The trio behind the fund are Henrik Rhenman, who has more than 15 years' experience of managing healthcare funds and is also chief investment officer, Göran Nordström, the former chief executive of Carnegie Asset Management, and myself, a former portfolio strategist at Fidelity Investments.
In 1998, Henrik founded the team that managed the Carnegie Global Healthcare Fund, which under his leadership up to 2008 became the world's most successful healthcare fund, with an increase of nearly 800 per cent during a period when the global equity index increased a mere 40 per cent in US dollar terms. He also managed Carnegie Medical, which since its launch in 1999 showed an increase of more than 160 per cent.
The Rhenman Healthcare Equity L/S fund is unique in that it is supported by a world-class scientific advisory board. The board boasts a broad network of hundreds of distinguished scientists and experts at internationally renowned scientific institutions all over the world, including the Karolinska Institute and the University of Uppsala.
HW: Who are your key service providers?
CG: Our fund administrator is SEB Fund Services, the custodian is Skandinaviska Enskilda Banken S.A., the fund's prime broker is Skandinaviska Enskilda Banken AB and it is audited by PricewaterhouseCoopers Luxembourg.
HW: How and where do you distribute the funds? What is the profile of your current and targeted client base? What is the split of your assets under management between institutional and private clients?
CG: The fund is aimed at both private investors and institutions. The minimum investment is SEK250,000 for retail investors and EUR 250,000 for institutions, offers monthly liquidity and will close to new investors at EUR500m.
At this initial stage we have focused almost entirely on high net worth individuals in Sweden to get a fairly broad investor base from day one. The second phase has just been launched in which we reach institutions and distributors in the Nordic region. We are having discussions with numerous counterparties that we expect to bear fruit during the autumn.
During the second part of the autumn we will also initiate marketing activities outside the Nordic region, once we have built an even longer track record as well as having increased assets under management to a level where large international institutions can allocate to the fund.
At the moment almost all our assets are from private clients, but we expect inflows within the coming months from institutional clients so the split between institutional and private clients will end up being roughly 70/30.
HW: What is your investment process?
HR: The stock-picking investment process is mainly focused on analysis of the newsflow relating to products, as the profitability of the healthcare industry is largely determined by the sales of individual high-margin products.
Besides regular company reports, the newsflow consists of scientific data as well as regulatory and commercial events. The competitive landscape is of particular importance as the medical field is dynamic.
The newsflow also has to be translated into valuation metrics and be risk-adjusted. A scientific advisory board is a seamless part of the investment process to ensure the proper integration of scientific and commercial aspects.
HW: How do you generate ideas for your fund?
HR: Ideas are generated mainly through the analysis of newsflow but also through valuation screening. The universe, listed companies with a market cap exceeding USD200m, consists of approximately 500 companies, which are systematically followed.
HW: What is your approach to managing risk?
HR: The risk management system consists of three parts: liquidity (75 per cent of the portfolio should be very liquid, in essence realisable in one trading day), a stop-loss function (a 6 per cent decline in net asset value in a calendar month will trigger a risk-adjustment process to maximum 40 per cent net exposure and 60 per cent gross), and a daily value at risk limit of 3 per cent (99 per cent confidence interval). The net exposure over time will likely be between 30 and 80 per cent but may be outside this range.
HW: How has your recent performance compared with your expectations and track record? Do you expect your performance or style to change going forward?
HR: The fund was recently launched and the strategy is long/short equity, so compared with my previously managed funds I now have the possibility to invest in a lot more instruments as well as being able to modify the net and gross exposure, depending on my market outlook.
HW: What opportunities are you looking at right now?
HR: Extremely low expectations and low valuations combined with perceived political risk that may not be easily quantified makes the sector very interesting, as politics is seldom the turning points for fundamentals.
The most likely outcome of healthcare reform in the US is higher consumption because a major motive of reform is to insure the uninsured. Healthcare expenditures as a proportion of GDP are likely to continue to expand somewhat in the US and significantly elsewhere.
HW: What events do you expect to see in your sector in the year ahead?
HR: We see continued stable performance in most sub-sectors. Political headlines can disturb, but also create buying opportunities.
HW: How will these developments affect your own portfolio?
HR: The portfolio is very much focused on companies with unique products less affected by healthcare reform initiatives.
HW: Are investors' expectations moving towards capital preservation? If so, how do you deal with this?
HR: Capital preservation strategies are positive for the fund, as many healthcare investors appreciate the long/short capability which aims to enhance performance and lower risk in times when the overall market is going down or sideways.
HW: What differentiates you from other managers in your sector?
CG: Few fund managers have more than a decade of sector experience. This fund manager has managed healthcare funds for more than fifteen years and is one of the world's most experienced healthcare fund managers and, according to the Bloomberg system, has the very best track record with one of the funds being up nearly 800 per cent in nine years. The manager has also received awards such as Best Global Equity Fund from the Financial Times, Best European Pharmaceutical Fund from Lipper and Best Healthcare Fund Manager from Dagens Industri.
The asset management firm has also established a renowned scientific advisory board, chaired by Professor Bertil Hållsten. The company's board members include Professor Hans Wigzell, former principal of the Karolinska Institute and former chairman of KI's Nobel Prize Committee, and Håkan Åström, former chief executive of Kabi Pharmacia.
HW: Do you foresee problems in raising mandates from investors through 2009? If so, what factors will drive investors back to your fund?
CG: One has to be very humble in these types of markets and understand fund investors' challenging task to allocate assets among a vast range of investment opportunities. But I think we will definitely profit from having an extremely experienced fund manager with a superior track record, and the fact that we are active in one single sector, as opposed to generalists, increases the likelihood of good future returns and thereby our relative attractiveness in the market.
HW: Do you have any plans for other product launches in the near future?
CG: We want to focus 100 per cent on making Rhenman Healthcare Equity L/S a great success so we do not foresee any other product launches in the near future.
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