H&Q Healthcare Investors (ticker:HQH)

H&Q Healthcare Investors (ticker:HQH) appears to a be a decent value now within the closed-end fund universe. It is broadly diversified, and primarily invests in biotechnology, medical devices, pharmaceuticals and medical delivery. It also invests a limited portion of the portfolio in smaller, emerging companies and some restricted securities. In their last SEC filing (as of June 30), the top five holdings were: Teva, Gilead, Celgene, Amgen and Biogen.

On August 4, the fund discontinued their managed distribution policy. HQH had been paying out 2% of NAV in capital gains distributions every quarter for many years. The purpose of this policy was to narrow the discount to NAV, but the policy was not fully successful and mainly just reduced the NAV of the fund. On August 5, the day after the press release, the discount to NAV jumped up three percent from -17.78% to -20.73%.

On September 30, the fund announced a share repurchase plan to enhance shareholder value and narrow the discount to NAV. They will purchase up to 10% of the shares in the open market. This can occur during the one year period following October 9, 2009.

Here are some recent stats on HQH:

Ticker:HQH     H&Q Healthcare Investors   no regular dividend 

  • Total Net Assets= 343 MM
  • Expense ratio= 1.51%              Discount to NAV= -20.27%
  • Portfolio Turnover rate= 65%

Disclosure: Long HQH

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4 responses to “H&Q Healthcare Investors (ticker:HQH)

  1. Hi! HQH looks like an attractive buy from the quantitative perspective. Why is it selling at 20% discount? Does the future of their holdings look that bleak?

    • Ash~-
      One reason for the big discount is because HQH no longer pays out regular distributions. I think many retail CEF investors are overly focused on the dividend payout, and not focused enough on total returns. One way to exploit this anomaly is to seek closed-end funds with low dividend payouts, where this is a good chance of dividend increases in the future.

  2. Thanks for the explanation.
    I assume that your bet on HQH is based on the speculation that there is a good chance of dividend increase in the future?
    BTW, I liked your TFCVX idea, I am long on it too.

    • Ash-

      I think HQH is a decent discounted investment vehicle for biotech and health care, but not necessarily a “load the boat” investment at these prices. I think the dividend payouts may be increased at some point in the future which could narrow the discount to NAV. But closed-end fund discounts usually revert to the mean, so the HQH discount will likely decrease even if there is not an increase in dividend payouts.

      I like TFCVX (I own TFCIX, the sister fund) a lot except for the 2% exit redemption fee. So far it is doing OK. I usually like to use a mental trailing stop on bond fund investments, but the 2% is so high that I plan to hold it for at least a year regardless.

      George

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