Why This Insurer's $30-Billion Move Is Good For Aberdeen's CEFs

UK insurer Phoenix Group is withdrawing £22 billion (US$30 billion) from asset manager Aberdeen Group plc to manage in-house, a move occurring amidst Aberdeen's documented performance challenges and negative market sentiment. However, the article identifies two Aberdeen-managed healthcare closed-end funds (CEFs), abrdn Healthcare Investors (HQH) and abrdn Healthcare Opportunities Fund (THQ), as notable opportunities, offering over 12% dividends and trading at significant discounts to NAV. HQH is specifically highlighted for its deeper 6.4% discount, superior NAV performance, and a portfolio of established large-cap healthcare companies, presenting a potential entry point for income and capital appreciation given current sector pessimism may be overdone.

Analysis

Asset manager Aberdeen Group plc (SLFPY) is facing significant operational headwinds, underscored by a £22 billion mandate withdrawal from UK insurer Phoenix Group and a history of underperformance in some of its international CEFs like AWP and ASGI. Despite this negative backdrop for the parent company, a specific contrarian opportunity has been identified within two recently acquired healthcare closed-end funds: abrdn Healthcare Investors (HQH) and abrdn Healthcare Opportunities Fund (THQ). These funds, acquired in October 2023, offer substantial dividend yields of 12.4% and 12.7% respectively. Both funds have historically outperformed the benchmark pharma ETF over the last three years, even as the healthcare sector faces pessimism from potential regulatory changes and pricing pressures. The primary investment thesis centers on abrdn Healthcare Investors (HQH), which is presented as the more compelling of the two. HQH trades at a deeper discount to its net asset value (NAV) of 6.4% compared to THQ's 3.7%, and its underlying portfolio has demonstrated superior NAV total return performance. Furthermore, HQH's portfolio is positioned with a degree of relative safety, with top holdings in established large-cap pharmaceuticals like Amgen (AMGN), Vertex (VRTX), and Eli Lilly (LLY), strengthening the argument for its discount to narrow over time.

Key Decisions for Investors

• Consider initiating a position in abrdn Healthcare Investors (HQH) to capture its high 12.4% dividend yield while benefiting from its 6.4% discount to NAV, which is superior to its peer, THQ.
• Monitor the fund's discount to NAV, as its potential to narrow presents a catalyst for capital appreciation, which could accelerate with any improvement in sentiment towards the broader healthcare and pharmaceutical sector.
• Investors should weigh the specific fund opportunity against the backdrop of significant outflows at its parent manager, Aberdeen, and the persistent political and regulatory headwinds facing the pharmaceutical industry.