GRX - GRX: Modest Healthcare Fund Trading At A Steep Discount
2023-08-15 01:04:41 ET
Summary
- The Gabelli Healthcare & Wellness Rx Trust seeks to provide capital gains and income from a portfolio of healthcare and wellness-focused stocks.
- The fund pays an attractive 6.1% distribution yield that is well funded by its long-term 5-7% total returns.
- However, compared to peer funds, the GRX fund has much higher expenses, lower total returns, and higher portfolio volatility. I would personally seek healthcare exposure elsewhere.
I have now written two cautious articles on Gabelli funds, the Gabelli Global Utility & Income Trust ( GLU ) and the Gabelli Utility Trust ( GUT ). The common 'feature' of the two Gabelli funds are poor long-term returns and high distributions that are not supported by fund returns. This has piqued my interest, are they exceptions or the rule for Gabelli investment funds in general?
In this article, I will take a look at the Gabelli Healthcare & Wellness Rx Trust ( GRX ), to see if it shares common problems of the Gabelli utility funds.
Fund Overview
The Gabelli Healthcare & Wellness Rx Trust is a closed-end fund ("CEF") with a goal of delivering long-term growth of capital and current income. The GRX fund primarily invests in the healthcare and wellness industries.
The GRX fund has $201 million in net assets as of June 30, 2023, and has 24% effective leverage. The GRX fund charged a 3.11 net expense ratio in fiscal 2022.
Like the GUT and GLU funds mentioned above, the GRX fund is lead managed by Mario Gabelli , an award-winning fund manager and founder of Gabelli Asset Management ("GAMCO"). Seeing Mr. Gabelli listed as the manager of so many funds leads me to suspect he may not be participating in much of the day-to-day portfolio management decisions of the funds he 'manages' (Figure 1).
Figure 1 - Mr. Gabelli manages an incredible 21 funds (gabelli.com)
Portfolio Holdings
Figure 2 shows the sector allocation of the GRX fund. The GRX fund's largest sub-sector allocations are in Health Care Providers (21.4%), Health Care Equipment (20.9%), Food (19.8%), and Pharmaceuticals (16.8%).
Figure 3 shows the top 10 holdings of the GRX fund, which amount to 25.3% of the fund. The fund's holdings are fairly diversified, with no single holding dominating the weighting.
Returns
The GRX fund has delivered modest long-term returns with 3/5/10/15Yr average annual returns of 4.1%/4.8%/6.9%/9.6% respectively to July 31, 2023 (Figure 4).
However, the GRX fund's performance significantly lags that of the healthcare and staples sectors, from which the manager selects the fund's holdings. Figure 5 shows the historical returns of the Health Care Select Sector SPDR ETF ( XLV ), and Figure 6 shows the historical returns of the Consumer Staples Select Sector SPDR ETF ( XLP ).
The low cost passive XLV ETF has returned 10.0%/10.5%/11.9%/12.0% on a 3/5/10/15Yr basis to July 31, 2023, while the XLP ETF has returned 9.3%/10.1%/9.1%/10.0%.
Distribution & Yield
One common feature of the Gabelli funds is an attractive distribution yield. The GRX fund does not disappoint, paying a $0.15 / quarter distribution that annualizes to 6.1% (Figure 7). On NAV, the GRX fund is paying a 5.1% distribution yield.
Historically, the GRX fund has been funding its distribution from a combination of net investment income ("NII") and capital gains, with the occasional use of return of capital ("ROC") (Figure 8).
Figure 8 - GRX distribution is funded from NII and capital gains (GRX annual report)
Given the fund's long-term returns of ~5-7% over 5 to 10 years compared to its 5% of NAV distribution yield, I believe the GRX fund's distribution is sustainable.
GRX Trades At A Significant Discount
The GRX fund is trading at a significant discount to NAV of 17.8% (Figure 9).
Figure 9 - GRX trades at a 18% discount to NAV (cefconect.com)
However, investors looking for a rapid closing of the discount may be disappointed as the GRX fund has been trading at discount to NAV almost from day one.
GRX vs. Peers
Figure 10 objectively compares the GRX fund against the Tekla Healthcare Opportunities Fund ( THQ ), the BlackRock Health Sciences Trust ( BME ), and the XLV ETF.
In terms of fund structure, we can see the GRX fund is currently trading at the steepest discount to NAV, which may appeal to some value-conscious investors. However, the GRX fund also has the highest expense ratio by far.
Figure 10 - GRX vs. peers (Author created with data from Morningstar, Seeking Alpha, and company reports)
In terms of annualized returns, the GRX fund lags far behind its CEF peers, with the weakest 1/3/5/10Yr returns compared to THQ, BME, and XLV. Furthermore, the GRX fund also has much higher portfolio volatility compared to the peer funds, leading to the lowest Sharpe Ratios. Its maximum drawdown in the past 5 years is almost double that of the passive XLV ETF.
In terms of distribution yield, the THQ fund has a higher distribution yield while the BME fund has the best combination of high total returns and attractive distribution.
Overall, I believe investors looking for the high distributions from health care stocks should consider the THQ and BME funds instead of the GRX fund. THQ and BME both have better returns and lower fees, while delivering similar or better distribution yields.
Conclusion
The Gabelli Healthcare & Wellness Rx Trust is a healthcare-focused closed-end fund. On the positive side, unlike the GLU and GUT funds that I have reviewed recently, the GRX fund is not an amortizing 'return of principal' fund that cannot earn its distribution. However, I am not terribly excited by the GRX fund's combination of high fees and modest returns.
I believe investors seeking high distributions from healthcare stocks may want to consider the THQ and BME funds instead of GRX.
For further details see:
GRX: Modest Healthcare Fund Trading At A Steep Discount