Next Edge Bio-Tech Plus Fund: Commentary

FUND COMMENTARY – JANUARY 2019

January played out as the mirror image of December. It began when the concrete in which the Fed’s feet were set, showed signs of cracking. That reprieve was a game changer, corroborated by the intensely positive market breadth and volume surges typical of the kickoff of new bull markets. While the selling of “risk-on” assets last quarter was amplified by need by institutions to liquidate positions ahead of year-end, and tax-selling for individuals, it presented a spectacular opportunity by investors taking advantage of that forced liquidation. Ignoring the screams and following our indicators, we closed out profitable put-open hedges and with the proceeds ventured into the deep-end. The January performance reflects these actions.

For January, the Next Edge Bio-Tech Plus Fund (the “Fund”) Class A Units advanced +16.42% while the Class F Units rebounded +16.53% vs +13.40% for the Nasdaq Biotech Index (^NBI) and +23.92% for the Fund’s Benchmark. The January recovery has focused on the sweet spot of the companies the Fund focuses on owning: Late Phase with breakthrough science underpinning potentially blockbuster products. Ideal M&A candidates.

The recreational cannabis stocks were on fire in January. The components by weight surged 82%, 43%, 89%, and 53%. Now comprising over 65% of the TSX Healthcare Index (^TTHC), why they were classified as healthcare and not consumer products remains a mystery to be deciphered. Their dance partners have been other obvious medical innovators such as liquor and tobacco companies, also known for their life-saving products. These price-taking commodity companies have muscled-out genuine Canadian healthcare companies, relegating them to a small fragment of the TSX Healthcare Index (^TTHC). Since being loaded into that index two years ago, it has sharply skewed the Fund’s Benchmark upward and does not reflect the actual healthcare investing environment.

A COLLAGE OF HOLDINGS CONTRIBUTING TO JANUARY RETURNS

Price charts cover 2-month period November 30th, 2018 to January 31st, 2019.

In December, “Good News” was Bad news. In January, “Good News” was once again Good News.

BIOTECH INDICATOR SUGGEST NEW SUSTAIN ADVANCE UNDERWAY

The percent of the +190 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 NBI (^NBI) typically makes multi-year bear market lows when this reading dips below 10%, as it did in 2002, 2008 and 2016. Each episode has been followed by years of positive returns.

Does last month’s 8% panic reading suggest it may be another watershed event? This much is known. Those readings are rare, and have been separated by 7, 7 and 3 years and can only occur when liquidation becomes consensus, and prices reflect that. If the past is prologue, then even on a corrective retracement of the January advance from 8% to 30%, that reading below 10% won’t be seen again. More likely is stabilization around current levels, then a future advance that lifts this indicator into the +60% range, similar to the 2nd half of 2016.

BNN BLOOMBERG APPEARANCES ON DECEMBER 31st AND JANUARY 3rd

The kind folk at BNN Bloomberg twice requested in one week, your Portfolio Manager’s perspectives on the outlook for the Healthcare sector in 2019, and also the implications of the mega-merger between wounded giants Bristol-Myers (BMY) and Biotech pioneer Celgene (CELG). Click the link below to view each interview.

How to Reduce risk when investing in Biotech Stocks
Dec 31st 2018Eden Rahim discusses the steep decline in biotech stocks, how to reduce the risk when investing in the sector, and several Canadian names that are attractive opportunities.

Celgene-Bristol-Myers deal a good fit
Jan 3rd 2019Eden Rahim talks about Bristol-Myers Squibb’s plan to acquire Celgene.

BIOTECH INVESTING WEBINAR

In January we hosted an introductory Webinar on The Next Edge Approach to Investing in Biotechnology. The aim was to elucidate the many spectacular breakthroughs unfolding and which will unfold in the years ahead. That through investing in Biotech:

– You are funding trials to develop therapies that will save or improve countless lives in the future.

– Due to the complex science, volatility and hurdles, this is not a DIY sector but best to take a diversified investment approach.

– To achieve significant long term returns, we provide a disciplined investment process refined over two decades, to finding the select few companies with the best chance of commercial success.

COMPOSITION OF HOLDINGS FOR JANUARY 31, 2019

Year-end bargains galore presented outstanding buying opportunities. As such, Cash was further drawn down early January, then increased again by month-end after a substantial rally. Between year-end 2018 and the end of January, Cash decreased from 13% down to 10%. US holdings increased from 40% to 43% due to the buying opportunities afforded and performance.

Canadian Holdings were flat at 47% as some positions were trimmed, and proceeds recycled into financings for clinical trials.

 

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. The historical annualized rates of return for January 31, 2019 for Class A are 1 yr -13.50%, 3 yr 5.52%, 5 yr – N/A, 10 yr – N/A, CARR -1.72%; for Class A1 are 1 yr -12.32%, 3 yr 6.27%, 5 yr – N/A, 10 yr – N/A, CARR 0.29%; for Class F are 1 yr -12.53%, 3 yr 6.03%, 5 yr – N/A, 10 yr – N/A, CARR 0.05%; for Class F1 are 1 yr -11.35%, 3 yr 7.16%, 5 yr – N/A, 10 yr – N/A, CARR 1.18%.
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 January 31, 2019 are 1 yr 7.38%, 3 yr 6.00%, 5 yr – N/A, 10 yr – N/A, CARR 0.73%.
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.
No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. These securities have not been and will not be registered under the United States Securities Act of 1933, as amended, or any state securities laws and may not be offered or sold in the United States or to U.S. persons except pursuant to an exemption from the registration requirements of those laws.
The information provided herein is for information purposes only and does not constitute a solicitation, public offering, advice or recommendations to buy or sell interests in the Fund, the Portfolio, Units or any other Next Edge Product. Please refer to the Fund’s prospectus for more information on the Fund as any information in this Report is qualified in its entirety by the disclosure therein.