Objective and strategy
The Eventide Healthcare & Life Sciences Fund seeks to provide long-term capital appreciation. The manager selects equity and equity-related securities of firms in the healthcare and life sciences sectors. The manager’s valuation standards aren’t spelled out, except to say that he’s looking for “attractively valued securities.” The advisor imposes a set of ESG screens so that it limits itself to firms that “operate with integrity and create value for customers, employees, and other stakeholders,” which includes its immediate community and the broader society. Some of the firms in which it invests, especially in the biotech sector, are “development stage companies,” which implies that their stock is illiquid and potentially very volatile. Up to 15% of the portfolio might be invested in such securities. At the same time, up to 10% can be invested in derivatives that help hedge the portfolio.
Eventide Asset Management, LLC. Founded in 2008, Eventide is a Boston-based adviser that specializes in faith-based and socially responsible investing. They manage more than $2 billion in assets through their two (and soon to be three) mutual funds.
Finny Kuruvilla. Dr. Kuruvilla has been a busy bee. In addition to managing the Eventide funds, he’s a Principal with Clarus Ventures, a health care venture capital firm with $1.7 billion in assets. In that role, he sits on several corporate boards. He has earned an MD from Harvard Medical School, a PhD in Chemistry and Chemical Biology from Harvard, a master’s in Electrical Engineering and Computer Science from MIT, and a bachelor’s degree from Caltech in Chemistry. Somewhere in there he completed medical residencies at two major Boston hospitals and served as a research fellow at MIT. He completed his residency and fellowship at the Brigham & Women’s Hospital and Children’s Hospital Boston where he cared for adult and pediatric patients suffering from a variety of hematologic, oncologic, and autoimmune disorders. Subsequently, he was a research fellow at MIT where he did incredibly complicated statistical stuff. He’s coauthored 15 peer-reviewed articles in science journals and also manages Eventide Gilead Fund.
Strategy capacity and closure
“Strategy capacity” refers to the amount of money that a manager believes he or she can handle without compromising the strategy’s prospects. Sometimes the limitation is imposed by the nature of the strategy (microcap strategies can handle less money than megacap ones) and sometimes by the limits of the investment team’s time and attention. In general, managers who can articulate the limits of their strategy and have thought through how they’ll handle excess inflows do better in the long run than those you make it up as they go. The Eventide managers report that “Eventide has not discussed closing the fund and is not expecting capacity issues until the fund gets to about $2 billion in AUM.”
Unknown. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. The fund’s active share hasn’t been calculated, though its low correlation with its benchmark suggests a fairly active approach.
Management’s stake in the fund
Dr. Kuruvilla has invested under $100,000 in this fund and between $100,001-$500,000 across his two funds. None of the fund’s independent trustees have any investment in the Eventide funds. As of October 1, 2014, the officers and Trustees collectively owned less than 1% of the fund shares; that translates to less than $200,000.
December 27, 2012
$1,000 for a regular account, $1,000 for an IRA account, or $100 for an automatic investment plan account.
1.63% on assets of $360 million. There is a 1% redemption fee for shares held fewer than 180 days.
The argument for Eventide Healthcare is pretty straightforward: it’s the hottest fund in the hottest sector of the U.S. economy and it’s led by a manager with an unparalleled breadth of training and experience.
The Wall Street Journal’s mid-year report on the mutual funds with the best 10-year performance offered the following list of specialties:
- Health sciences
- Health sciences
- 2x leveraged NASDAQ
Those funds earned an average of 19% per year. At the same time, the Total Stock Market Index clocked in at 8% per year.
And so far in its short life, Eventide Healthcare is among the field’s strongest performers. It has, since inception, handily beaten both the field and the field’s two most-respected funds, Vanguard Health Care (VGHCX, the only fund endorsed by Morningstar analysts) and T. Rowe Price Health Sciences (PRHSX). Here are the returns on a hypothetical $10,000 investment made on the day Eventide launched in December 2012:
|T. Rowe Price Health Sciences||24,750|
|Health care peer group||22,750|
|Vanguard Health Care||21,440|
In 2015, through the end of July, Eventide has returned 28.6% – 9% better than the average healthcare fund and 25% above the broad stock market. Despite those soaring returns, Mr. Kuruvilla concludes that the key biotech “sector is significantly less overvalued than the S&P 500 as a whole. While individual biotech companies may indeed be overvalued, we see no reason to believe that overvaluation is endemic in the sector.”
Much of the credit belongs to its manager, Finny Kuruvilla. His academic accomplishments are formidable. As I note above, Dr. Kuruvilla has an MD and a PhD in chemical biology (both from Harvard) and a master’s degree in engineering and computer science (from MIT). His professional investing career includes both the Eventide fund and a venture capital fund. That second tier of experience is important, since VC funds tend both to be far more activist – that is, far more intimately involved in the development of their charges – than mutual funds and to focus on a distinct set of early stage firms whose prospects might explode. About 70% of the Eventide fund is invested in biotech stocks and 40% in microcaps; most of the remainder are small cap firms.
The other investor with a similar range of expertise was Kris Jenner, the now-departed manager of T. Rowe Price Health Sciences. Mr. Jenner managed to leverage his deep academic and professional knowledge of the growing edge of the healthcare universe – biotech firms, among others – into the third best 10-year record among the 7000 funds that Morningstar tracks.
That said, prospective investors need to attend to four red flags:
The manager has two masters. Mr. Kuruvilla is a principal at Clarus Ventures, a healthcare venture capital firm with $1.7 billion in assets. He’s managed investments for both firms since 2008. That might raise two concerns. The first is whether he’s able to juggle both sets of obligations, especially as assets grow. The second is how he handles potential conflicts of interest between his two charges. If, for example, he discovers a fascinating illiquid security, he might need to choose whether to invest for the benefit of his Clarus shareholders or his Eventide ones.
Eventide’s conflict-of-interest policy addresses his role at Clarus, but mostly concerning how he will deal with non-public information and trading in his personal accouts, not how he would deal with potential conflicts between the needs of the two funds.
Asset growth might impair the strategy. The fund is attracting steadily inflows. It has grown from $40 million at the end of 2013 to $150 million at the end of 2014 to $300 million at the start of July, 2015. By the end of July, they’d reached $350 million. For a fund whose success is driven by its ability to find and fund firms in “the smallcap biotech space,” 40% of which are microcaps and some of whom are privately traded and illiquid, sustained asset growth is a real concern. Sadly that growth has not yet translated into low expenses; it is the third most-expensive of the 31 health care funds.
The question of volatility needs to be addressed. Despite its ability to hedge volatility, the fund declined by almost 20% in the late spring and early summer, 2014. Its peers dropped 7.4% in the same period. Since inception, its downside deviation and Ulcer Index, a measure that combines the magnitude and duration of a drawdown, are two to three times higher than its peers.
The managers are aware of the issue, but consider it to be part of the price of admission. David Barksdale, co-portfolio manager on the Gilead fund and managing partner of Eventide, writes:
A draw-down like that in early 2014 for the Healthcare fund should be considered normal for the fund. There was a pullback in biotech stocks at that time and these are a regular feature of the industry. Although individual biotech companies tend to be uncorrelated on their fundamentals, investors tend to trade their stocks as a group via ETF’s or otherwise and investor sentiment changes can precipitate these kinds of draw-downs.
He reports that “we generally see these drawdowns at least once a year.” The ability to exploit the market’s excessive reactions are an essential part of generating outsized gains (“We tend to keep some cash on hand in the fund to be able to take advantage of these pullbacks as buying opportunities.”) but they may prove difficult for some investors to ride through.
The quality of shareholder communications is surprisingly low. Communication between the manager and retail shareholders is limited to a three page letter, covering both funds, in the Annual Report. The semi-annual report contains no text and there are no shareholder letters. There are quarterly conference calls but those are limited to financial advisers; copies are password protected. The adviser does maintain a rich archive of the managers’ media appearances.
Eventide Healthcare and Life Sciences has a fascinating pedigree and a outstanding early record. Mr. Kuruvilla has the breadth of experience at training – both academic and professional – to give him a distinct and sustained competitive advantage over his peers. That said, enough questions persist that investors need to approach the fund cautiously, if at all.