Next Edge Bio-Tech Plus Fund: Commentary

FUND COMMENTARY – MARCH 2019

As the risk of higher interest rates continue to abate and limited options remain for investors seeking companies not dependent on a strong economy for growth, attention has increasingly turned to biotech as one viable alternative. Despite respectable returns in January and February, the sector continued its advance in March, buoyed as this realization set in.

Allocation to biotech was further amplified by the hysteria around the inversion of the US yield curve, signalling too-tight monetary policy in the last bastion of growth in an anemic growth world. This phenomenon was quantified in a recent Raymond James report3 on March 26th highlighting the propensity of biotech to outperform the market from the point of yield curve inversion. The study was further corroborated by a Bernstein report4 highlighting that healthcare had delivered positive returns six months and 12 months in each of the past five curve inversions dating back to November 1980. While every recession has been preceded by an inversion, not every inversion has led to a recession. The inversions in 1989 and 1998 led to explosive forward returns for biotech, even as other sectors floundered.

For March, the Next Edge Bio-Tech Plus Fund (the “Fund”) Class A Units advanced +3.05% and the Class F Units +3.15% versus +0.32% for the Fund’s Benchmark. For the first quarter and year-to-date, the Class A Units advanced +35.81%1 and the Class F Units +36.18%1, more than doubling the +15.40% advance for the Nasdaq Biotech Index (^NBI).

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3. Raymond James U.S. Research, Biotechnology – March 26, 2019
4. Bernstein U.S. Portfolio Strategy – March 26, 2019

IS A REBOUND IN BIOPHARMA M&A UNDERWAY?

2018 experienced the lowest level of BioPharma M&A in a decade, despite the expectation that tax repatriation would lead to a plethora of activity. Instead, most large-cap BioPharma companies spent that windfall on stock repurchases. In contrast, 2019 is unfolding differently. We are seeing a rebound in BioPharma spending on pipeline rebuilding through M&A and collaborations, which has significantly benefitted the Fund. In expectation of more activity ahead, the late-phase biotechs we focus on are among the best performing companies in the sector year-to-date.

PERCENT OF STOCKS ABOVE 200-DMA SUGGEST STILL EARLY IN NEW ADVANCE

The percent of the +200 companies in the Nasdaq Biotech Index (^NBI) trading above their 200-day moving average declined to 8% in late December from 60% in August. The Nasdaq Biotech Index (^NBI) typically makes multi-year bear market lows when this reading dips below 10%, as it did in 2002, 2008 and 2016. Each episode as followed by years of positive returns. Historically, this measure achieves a reading of 80% to 90% before a new advance rests.

For 29 months between July 2016 and October 2018, this indicator oscillated between 40% at the bottom of the range and 65% to 70% at the top of the range. Despite the 2019 rally, this reading has moved up only to the bottom or oversold reading of the past 2.5 years. This suggests there is plenty of room for the rally to stair-step upward in the months ahead before any semblance of an overbought reading is achieved.

COMPOSITION OF HOLDINGS FOR MARCH 29, 2019

The increase in cash holdings in February to 12% was attributable to monetizing the two holdings that received takeover offers, Spark Therapeutics Inc. (ONCE) and Clementia Pharmaceuticals Inc. (CMTA), and was redeployed in March, adding to existing positions and initiating three new positions. As a result, cash decreased to 7%.

The increase in the weight of Canadian Holdings from 49% to 53% is due to financing new Fund investments. US positions increased from 39% to 40% due to appreciation.

1. Next Edge Bio-Tech Plus Fund returns are net of all fees and expenses associated with Class A Units charged from May 1, 2015. Next Edge Bio-Tech Plus Fund returns are net of all fees and expenses associated with Class A1 Units, Class F Units, and Class F1 Units charged from March 1, 2015. Returns for 2019 are unaudited. Therefore, performance statistics containing 2019 figures shown in this material are subject to final confirmation. The historical annualized rates of return for March 29, 2019 for Class A are 1 yr -2.48%, 3 yr 12.71%, 5 yr – N/A, 10 yr – N/A, CARR 2.21%; for Class A1 are 1 yr -1.15%, 3 yr 13.50%, 5 yr 3.41%, 10 yr – N/A, CARR 4.03%; for Class F are 1 yr -1.38%, 3 yr 13.26%, 5 yr 3.21%, 10 yr – N/A, CARR 3.78%; for Class F1 are 1 yr -0.05%, 3 yr 14.45%, 5 yr 4.20%, 10 yr – N/A, CARR 4.96%.
2. The Benchmark for the Next Edge Bio-Tech Plus Fund is:
(i) 40% of the percentage gain or loss of the S&P/TSX Capped Health Care Index; plus
(ii) 60% of the percentage gain or loss of the NASDAQ Biotechnology Index
The Benchmark returns are unaudited and subject to final confirmation. The historical annualized rates of return for the Benchmark for March 29, 2019 are 1 yr 19.54%, 3 yr 10.08%, 5 yr – N/A, 10 yr – N/A, CARR 1.37%.
3. Part Year
* Part Month start date April 13, 2015 to April 30, 2015
** Part Month start date: February 17, 2015 to Feb 27, 2015. There are inherent limitations in any comparison between a managed portfolio and a passive index. Each index is unmanaged and does not incur management fees, transaction costs or other expenses associated with a private fund. There are risks inherent in hedge fund investing programs.
Note to Investment Professionals: The information in the Monthly Report is being provided to current investors in the Fund and is being provided to their registered dealers for informational purposes only.
This is not a sales literature and cannot be used as such.
Opinions expressed are those of the author as of the date of their publication, are subject to change and may not reflect the opinion of all members of the Company. Some statements contained in this material concerning goals, strategies, outlook or other non-historical matters may be “forward-looking statements” and are based on current indicators and expectations at the date of their publication. We undertake no obligation to update or revise them. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those implied in the statements.
The Fund is not a trust company and does not carry on business as a trust company and, accordingly, the Fund is not registered under the trust company legislation of any jurisdiction. Units of the Fund are not ‘deposits’ within the meaning of the Canada Deposit Insurance Corporation Act (Canada) are not insured under provisions of that Act or any other legislation.
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