GRX - GRX: High-Yielding CEF Available At Discount Suits Income-Seeking Investors

2023-03-20 16:40:42 ET

Summary

• The Gabelli Healthcare & Wellness Rx Trust generates above-average yield and is available at a huge discount. However, its annual average total return over the past five years is not that high.
• Aging demographics and adoption of new medical products and services has started delivering long-term growth for healthcare firms for quite some time.
• Despite a high expense ratio, The Gabelli Healthcare & Wellness Rx Trust’s stock selection is not that impressive. Most of its top investments failed to generate positive growth over the past one year.

~ by Snehasish Chaudhuri, MBA (Finance).

I have been tracking The Gabelli Healthcare & Wellness Rx Trust ( GRX ) for the past seven quarters. This healthcare and wellness industry focused fund has a consistent record of paying quarterly dividends, with a reasonably good yield. Its investment objective is to generate long-term capital growth, although its yield is enough to attract income-seeking investors. GRX was established 15 years ago, its return has replicated the S&P 500 index. Five-year total return of GRX stood at 28.5 percent as compared to 55.5 percent for S&P 500. However, this fund performed much better since the covid-19 pandemic, and recorded a total return of 40.33 percent during the past three years. Aging demographics and adoption of new medical products and services started delivering long-term growth for healthcare companies for quite some time.

Gabelli Healthcare & Wellness Rx Trust Generates Above-Average Yield

Gabelli Healthcare & Wellness Rx Trust is managed by Gabelli Funds, which is a part of GAMCO Investors Inc. Gabelli Funds deals with a variety of investment funds such as Mutual Funds, Money Market funds, and ETFs, etc. GRX has a well-diversified portfolio within major healthcare segments (66.21 percent) and food products sector (27.34 percent). GRX has been quite consistent in payment of dividends, with a strong enough yield. Average yield during 2023 has been 9.24 percent. During the past four years, average yield has been almost 7 percent. Funds that generate high and consistent yield might be a good option for investors. GRX has been moving downwards for more than 6 months. I expect the fund to move in the upward direction soon.

GRX Has Put its Weight Behind Six Large-Caps Over the Past Seven Quarters

When it comes to the major holdings (top 24 investments) of Gabelli Healthcare & Wellness Trust, I observed that the fund has consistently retained six stocks in its portfolio - Johnson & Johnson ( JNJ ), HCA Healthcare, Inc. ( HCA ), Bristol-Myers Squibb Company ( BMY ), AmerisourceBergen Corp. ( ABC ), Cigna Corporation ( CI ) and Evolent Health, Inc. ( EVH ). Throughout the past seven quarters, these are among the top investments, in which the fund invested at least 1.5 percent of its total assets. But what is surprising this time is that the fund has replaced one-third of its top portfolio of investments. This is despite the fact that GRX has a quite low turnover ratio of 14 percent.

However, the price performance of these stocks has not been exceptionally good. Only CI recorded positive price growth during the past 12 months. JNJ dropped by almost 14 percent during the past 12 months, and recorded a total price growth of only 16 percent during the past five years. BMY grew by only 0.67 percent during the past five years. Prices of CI, ABC recorded a price growth between 6 to 70 percent during the same period. EVH and HCA however did exceptionally well and grew by 114 and 148 percent respectively during the past 5 years. Thus, it will be wrong to assume that the stocks Gabelli Healthcare & Wellness Rx Trust is managed by Gabelli Funds persisted with, proves to be top-of-the world stock selection. It becomes more relevant, when we consider that the fund has a very high expense ratio of 2 percent.

Composition and Price Performance of Top Investments in GRX’s Portfolio

The new group of stocks among GRX’s top investments included Mondelez International, Inc. ( MDLZ ), Elevance Health, Inc. ( ELV ), Zimmer Biomet Holdings, Inc. ( ZBH ), Kikkoman Corporation ( KIKOY ), Yakult Honsha Co., Ltd. ( YKLTY ), Laboratory Corporation of America Holdings ( LH ), Stryker Corp ( SYK ), and Henry Schein, Inc. ( HSIC ). The remaining stocks among GRX’s top investments included CVS Health Corporation ( CVS ), Nestlé S.A. ( NSRGY ), Option Care Health, Inc. ( OPCH ), AbbVie Inc. ( ABBV ), Tenet Healthcare Corporation ( THC ), Chemed Corporation ( CHE ), Thermo Fisher Scientific Inc. ( TMO ), Pfizer Inc. ( PFE ) Merck & Co., Inc. ( MRK ) and Post Holdings, Inc. ( POST ). These 10 stocks, too, were included in the portfolio of Gabelli Healthcare & Wellness Rx Trust during my last coverage in December, 2022.

Among these 18 stocks, only six stocks recorded positive price growth during the past 12 months. These stocks were CHE, OPCH, YKLTY, POST, MDLZ and SYK. Again, only OPCH, YKLTY and POST recorded double digit price growth. Overall, price performance of GRX’s top investments weren't impressive. Rather, Gabelli Healthcare & Wellness Rx Trust had been more successful on the yield font. In my previous coverage, I focussed on six basic criteria while investing in CEFs. Criteria included a) low turnover ratio b) Strong discount from NAV c) decent or strong yield, d) double-digit price returns of major investments e) double digit annual average total return of the CEF over the long run, and f) low expense ratio. Gabelli Healthcare & Wellness Rx Trust found to fulfill half of those criteria, while failing miserably on the others.

How Gabelli Healthcare & Wellness Rx Trust Performed compared to its Peer Funds

Besides GRX, I have covered five other closed-end healthcare funds, such as Tekla World Healthcare Fund ( THW ), Tekla Life Sciences Investors ( HQL ), BlackRock Health Sciences Trust ( BME ), Tekla Healthcare Investors ( HQH ), and Tekla Healthcare Opportunities Fund ( THQ ). THW, as the name suggests, is a global fund, and is the only fund to have significant investments in global equity markets. THW is the only fund that has been able to post positive price growth over the past six months. During the same period, prices of BME, THQ, HQL and HQH fell by 5 percent, 5.6 percent, 5.4 percent and 6.2 percent, respectively. Unfortunately, GRX recorded the highest price loss. Over the past twelve months, barring THW, the price loss of all those funds were again highly negative - in double digits. Global diversification seems to have been advantageous for the funds operating in the healthcare and wellness industry.

Investment Thesis

Gabelli Healthcare & Wellness Rx Trust generates above-average yield and is good enough to attract income-seeking investors. However, the fund fails to excite. Despite a high expense ratio and such satisfactory yield, the stock selection is not extremely impressive. Most of its top investments failed to generate positive growth over the past twelve months. The stocks that are part of its portfolio on a consistent basis, also hadn't had any extraordinary performance. GRX’s total return over the past five years is not that high either. The only things that work well for this fund is a high-yield and current discount.

At present, The Gabelli Healthcare & Wellness Rx Trust is trading at $9.64, which is a discount of 16.6 percent from its net asset value. In my opinion, the income-seeking investors must hold this fund, and may accumulate more units too, due to its discount. However, for growth-seeking investors, this fund is of little importance.

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