Solskin
~ by Snehasish Chaudhuri, MBA (Finance)
I have been tracking The Gabelli Healthcare & Wellness Rx Trust (NYSE:GRX) for the past six quarters. This is a closed-ended fund (CEF) focused on the healthcare and wellness industry. It is a good fit for income-seeking investors due to its steady track record of paying quarterly dividends, with a reasonably good yield. In my previous coverages, I chalked out five basic criteria while investing in CEFs such as GRX. Those criteria were “a) at least six percent average annual yield; b) major investments of the fund generating strong returns over the long term; c) generating positive total return in most of the times; d) double digit average total return over a longer period of time; and e) a low expense ratio.” Following the same basic criteria, I’ll try to figure out whether GRX qualifies as a good investment option.
Price & Yield Performance of Gabelli Healthcare & Wellness Trust
The return of GRX has always been less than that of the S&P 500. I defended this phenomenon in my coverage in February 2022 by stating that “Unlike many of its peers, it doesn’t hold a major stake in any of its holdings. Its top ten holdings constitute only 23.33 percent of the total portfolio…While deep diversification is considered a good investment objective, GRX being an extremely diversified fund will hardly be able to beat the market return or return of S&P 500, which consists of the top 500 stocks. As a result, investors will always look forward to stability in terms of its price and dividend payments. GRX has been quite consistent in payment of dividend.”
Things have remained the same. GRX’s portfolio still is well diversified, and majorly invests its assets in various healthcare segments (68 percent) and food products (29 percent). Within healthcare, the company primarily targets stocks of pharmaceutical and healthcare services. Gabelli Healthcare & Wellness Trust has a total asset of $287 million. The annual average yield over the past 5 years (2017 to 2021) have been 5.2 percent. With such a steady yield, the fund has been able to generate an annual average total return of 12 percent during the same period. The stock is trading around a price of $10, which is almost 17 percent discount to its net asset value (NAV).
Gabelli Healthcare & Wellness Trust was trading around the same price during February 2022. When I covered this fund last time in May 2022, I found it to be trading around a price of $11. That time, I reiterated my position saying, “In my opinion, deep diversification is only beneficial if that also includes global diversification and sectoral diversification, which is not the case with Gabelli Healthcare & Wellness Rx Trust. GRX made very small investments in a huge number of stocks. But majority investments are in healthcare and consumer foods and only in the US market.” In my opinion, investors will be wise to judge this fund through yield and ignore the price movement, as that remains highly uncertain under the current macroeconomic scenario.
GRX Invests in Equities of Pharmaceuticals, Healthcare Services, Food Products
During Q3 2021, major holdings of Gabelli Healthcare & Wellness Trust in the Health Care Providers and Services segment were AmerisourceBergen Corp. (NYSE:ABC), Anthem, Inc. (NYSE:ANTM), and HCA Healthcare Inc. (NYSE:HCA). In the Food segment, the fund invested significantly in BellRing Brands Inc. (NYSE:BRBR), Campbell Soup Co. (NYSE:CPB), and Conagra Brands Inc. (NYSE:CAG). In the pharmaceuticals segment, almost 15 percent of the entire portfolio was invested in Abbott Laboratories (NYSE:ABT), Paratek Pharmaceuticals, Inc. (NASDAQ:PRTK), Merck & Co., Inc. (NYSE:MRK), Bausch Health Companies Inc. (NYSE:BHC), Achaogen Inc. (OTCPK:AKAOQ), Cigna Corporation (NYSE:CI), Bristol Myers Squibb Company (NYSE:BMY), and Johnson & Johnson (NYSE:JNJ).
The fund has a turnover ratio of 29 percent, and after five portfolio reconstructions, only 6 stocks (ABC, ANTM, HCA, BMY, CI, JNJ) still rank among the top investments of GRX. ANTM has been renamed to Evolent Health, Inc. (NYSE:EVH) and AKAOQ have become defunct. Here, it is worth mentioning that Gabelli Healthcare & Wellness Trust has a very high expense ratio of 2.24 percent. Besides these 6 stocks, at the end of Q4 2022, the major investments of GRX also included CVS Health Corporation (NYSE:CVS), Nestlé S.A. (OTCPK:NSRGY), Option Care Health, Inc. (NASDAQ:OPCH), AbbVie Inc. (NYSE:ABBV), Tenet Healthcare Corporation (NYSE:THC), Chemed Corporation (NYSE:CHE), Thermo Fisher Scientific Inc. (NYSE:TMO), Merck & Co., Inc. (MRK), Pfizer Inc. (NYSE:PFE) and Post Holdings, Inc. (NYSE:POST).
How GRX’s Major Investments Performed Over the Long Term
I tried to find out the compounded annual growth rate (CAGR) during the past 5 years, of all the above-mentioned stocks, in which GRX invested significantly over the past 6 quarters. Seven stocks – THC, TMO, OPCH, HCA, MCK, EVH, CHE – registered a price CAGR in excess of 17 percent. Another seven stocks – ABC, POST, ABBV, CI, PFE, CVS, NSRGY – grew in excess of 6 percent CAGR. Among the stocks removed from GRX’s portfolio – BRBR, CPB, CAG, PRTK, BHC – had performed poorly over the past 5 years. They recorded either price loss or marginal price growth during the period. Thus, I feel that GRX has selected the right stocks after a series of restructuring. However, the price loss incurred on the stocks that were removed has hurt it over the years.
Investment Thesis
Gabelli Healthcare & Wellness Trust generated an annual average yield of 5.2 percent between 2017 and 2021, marginally lower than my target of 6 percent. With such a steady yield, the fund has been able to generate an annual average total return of 12 percent during the same period. Major investments of the fund generated mixed returns over the past 5 years. But the good thing is the poor performing stocks have been replaced by well-performing ones. GRX generated positive returns in eight out of the past 10 years.
Gabelli Healthcare & Wellness Trust is trading at a discount of 17 percent, which makes it slightly attractive, though it has always been traded on discount. It has a very high expense ratio, but that should not be of too much concern as the returns are adjusted to this ratio. Another negative about the stock, the current year’s return can also be overlooked, as the broader market too has performed poorly. Thus, overall, the stock seems to be a good investment option, especially for income-seeking investors.
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