Portfolio Adviser has launched a new series entitled ‘Branching Out’, where we speak to highly-regarded members of the industry who previously held very different careers, before working in asset management.
In our first article of the series, we speak to Deane Donnigan, manager of the Polar Capital Healthcare Discovery Fund.
Prior to joining AXA Framlington in 1997, Donnigan spent seven years as a clinical pharmacist. Now with more than 25 years of fund management experience under her belt, she heads up Polar Capital’s $26m global small-cap healthcare mandate.
“We launched the fund in January 2020 – right before global pandemic. Had we had any idea what was about to happen, we would have never been able to get the fund out of the door. But I’m so, so glad we did.”
Less than three months after fund manager Deane Donnigan launched the $26m Polar Capital Healthcare Discovery Fund, the world plummeted into the unknown waters of a global health pandemic, which was to last far longer – and have many more long-term effects – than anybody could have predicted.
“We were at the point where private equity was just doing another follow on round on the public markets. So, these very small companies were listing very early on, which were mostly controlled by insiders, because these big private equity investments were following them through onto the public markets,” she explains.
“That’s fun when markets are very supportive, but we all know what it’s like when the market backdrop changes. Then there is not a lot of trading volume and there is no interest.”
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Donnigan likened the scenario to being a healthcare manager during the 2000 dot-com bubble, when human genome sequencing skyrocketed in popularity among investors, leading to “crazy valuations”. However, while people were blanket-buying “anything with the word ‘gene’ in the company title”, it led to a wealth of opportunities further down the cap spectrum and under the public radar.
“I have never worked as hard as I did through the launch of this product. Launching any product requires time and attention, but if you then bring a global medical crisis into the equation, it made it even harder to decipher all the market noise,” she says.
“Also, it’s not just science and medicine that we have to keep tabs on – it’s regulation and reimbursement – all sorts. We have to have our finger right there on the pulse.”
Healthcare frustrations
This is where Donnigan believes her background as a clinical pharmacist gives her a unique advantage as a fund manager. In fact, she points out that almost every member of the healthcare fund management team at Polar Capital has a background – or at least qualifications – in the field.
“When I’m looking for opportunities, from the very beginning I have a strong inclination in terms of whether what they do is meaningful. But I also have to marry that with whether it is viable as a business. Is there a return on investment?
“We can talk about all the great science and medicine, but if you can’t get it out there for the greater good then what is the point?”
What appealed to Donnigan about becoming a fund manager was the ability to “be part of the solution in healthcare”, and to offer funding to innovative companies as a way of improving efficiencies and reducing “a lot of frustration that everybody experiences with their healthcare systems”.
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“Gosh, there are some good things about our healthcare systems, but there are a lot of things that need work. And for the consumer that is really frustrating because you can look at other industries and how much they have evolved,” she reasons.
“For example, people are much more in control of their travel plans than their healthcare. They can order a pair of shoes, or a pizza, and they can track it and know exactly when it is going to arrive.
“But they can’t do that with a lab or a biopsy result. If their pizza gets cold that’s a bummer, but the ramifications are far more life altering within healthcare.”
‘The stars aligned’
Donnigan started her career at the Medical College of Georgia, having graduated as a Doctor of Pharmacy from the University of Georgia. After specialising in pediatric care for just over a year, she worked as a clinical pharmacist at Emory University Hospital in Atlanta, where her responsibilities included overseeing the operation of its drug information centre, becoming a member of its Pharmacy and Therapeutic and Antibiotic Use committees, and taking charge of Emory’s Drug Information newsletter and annual publication.
“Then, a social connection that I had to somebody who worked at Framlington [now AXA Framlington] mentioned to me that there was a lovely gentleman running a healthcare unit trust. That it had done really well, and he was looking to expand the team, but that he was an Oxford graduate and, while a voracious reader, wanted somebody with a proper background in the field to marry up with the business side of things,” Donnigan explains.
“Even though I had a couple of degrees under my belt, I really joined as a glorifed graduate, but I was very thankful of the opportunity. It was one of those things – the stars aligned, the doors kept opening, and I just kept walking through them.”
Now, since launch, Polar Capital Healthcare Discovery has returned 34.7% since launch, according to data from FE fundinfo, compared to its average peer in the IA Healthcare sector’s total return of 22.7%.
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It is more volatile than the sector average, but this is because of its focus on companies further down the cap spectrum.
Its largest holdings include the likes of Danish biotech firm Zealand Pharma, Virginia-based Evolent Health – which provides operational support to providers of healthcare plans – and Indian healthcare company Max Healthcare Institute.
The fund has an unconstrained approach in relation to its MSCI World Small Cap Health Care Total Return benchmark, which Donnegan says is why she is able to have a higher weighting to emerging markets – particularly India – than some investors might expect.
“This is based on great opportunities coming from a growing middle class [in India],” she says. “The country doesn’t have adequate health care infrastructure, so we are invested in a couple of companies which are doing just that – and not just with hospital facilities, but with outpatient clinics and diagnostics, laboratories.
“For the longest time the US has dominated the space, and our benchmark reflects that. Of course, a majority of the opportunities are still in the US, but our weighting is usually between 50% and 60%, whereas our benchmark will be closer to 70%.”
Sector-wise, the fund’s two biggest overweights are to oncology and obesity-related solutions – the latter of which includes state-of-the-art technology helping patients to prevent, reverse or manage type two diabetes.
“CGM – continuous glucose monitoring – is very exciting for us. It’s a sensor that you have to change every seven days, patients no longer have to prick their finger several times daily to check their blood sugar level,” Donnigan says.
“This piece of kit can send all that information right to your clinician, and the patient can see it too. It can help them to see which foods in their diet are causing blood sugar levels to spike, and which aren’t. Athletes are already using it in some cases, but it can be a very useful tool for individuals as well.
“They can also automatically administer insulin, which means it basically functions like a virtual pancreas. For patients, this takes the stress out of having to constantly think about their chronic health condition.”
Future opportunities
Looking ahead over the medium term, the fund manager points out that markets have been pricing in a recession for almost two years. This means investors often “throw the baby out with the bathwater”, leaving behind a host of attractively-valued opportunities.
“Investors are at a point where they’re not even sure whether they want to be in the equity market at all, let alone in small caps. Small caps really are pricing in a recession so valuations are really attractive, but it’s just off-radar.
“Healthcare is a meaningful part of most small-cap benchmarks and, as investors become less risk averse, the sector will benefit.
“There are so many interesting and dynamic healthcare trends happening in healthcare right now but they are going unnoticed relative to AI which is sucking all the air out of the room.
“It is healthy for investors to have exposure to different areas of the market, but it’s worthwhile maybe taking a look at the smaller healthcare stocks right now.”
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