Who is Tekla?
Tekla Capital Management LLC (“Tekla”) is a registered investment adviser based in Boston, MA and is the investment adviser for four closed-end healthcare-focused funds: Tekla Healthcare Investors (NYSE:HQH), Tekla Life Sciences Investors (NYSE:HQL), Tekla Healthcare Opportunities Fund (NYSE:THQ) and Tekla World Healthcare Fund (NYSE:THW) (together, “the Funds”). The Funds focus on healthcare and biotechnology investments in both public and restricted securities. Tekla is a relatively large and experienced healthcare-focused investment manager. Tekla’s investment approach is based on fundamental, bottom-up analysis of healthcare companies.
Who is Destra?
The Funds have partnered with Destra Capital Investments LLC (“Destra”) to service HQH, HQL, THQ and THW. Destra assists the Funds in the provision of investor relation services, including investor outreach, provision of materials and helping to keep the public informed of the benefits of investing in the Funds. Destra receives a fee from each Fund for its services.
What is a closed-end fund?
A closed-end fund is a publicly traded investment company that invests in a variety of securities, such as stocks and bonds. A closed-end fund raises capital primarily through an initial public offering (“IPO”). “Closed” refers to the fact that after an initial IPO, relatively few new shares are created nor are existing shares redeemed. Most closed-end funds are listed on a national exchange, where the fund’s shares are purchased and sold in transactions with other investors, not with the fund itself. When an investor wishes to purchase or sell shares of a closed-end fund, transactions occur through an exchange such as the NYSE or NASDAQ and may be subject to brokerage commissions. Such transactions may occur at either a premium or discount to the underlying net asset value per share.
What are the differences between HQH and HQL?
HQH (est. 1987) and HQL (est. 1992) are both non-diversified closed-end funds that invest in healthcare. In general, HQH and HQL are primarily investing in equities of healthcare companies. Both HQH and HQL can make investments in pre-public (“venture”) companies of up to 40% of its assets. Both Funds currently have equivalent dividend policies (please refer to appropriate fund distribution policies). The differences between the two Funds can generally be described as HQH being more broadly diversified within healthcare as well as having a relatively greater focus on commercial staged companies (e.g., companies that generate revenues and earnings). Generally, within healthcare, commercial staged companies will have larger market capitalization than those companies that are pre-commercial. In contrast, HQL is more concentrated in biotechnology. As a result of the relatively higher weighting in biotechnology, HQL generally invests a higher percentage of its assets in pre-commercial (and lower capitalization) companies as compared to HQH. Both Funds hold small emerging growth companies, however, given HQL’s biotechnology focus, the holdings have the potential to be more volatile. Of course, these smaller companies may have more room for appreciation given their stage of development. The Funds share the same portfolio manager, Daniel R. Omstead, Ph.D.
How much of each Fund can be invested in Venture Capital and Restricted Holdings?
HQH and HQL can each invest up to 40% of its net assets in venture or restricted securities. This includes restricted holdings in both public and private companies. THQ and THW may each invest an aggregate of 10% of its managed assets (includes leverage) in venture or restricted securities.
How do the Funds value their restricted securities?
Restricted securities are valued using a comprehensive fair valuation methodology. Most often, shares of private companies are initially valued at cost. Subsequently, Tekla monitors the status and progress of the securities issuers. Valuation changes are made as appropriate if there is a material departure from the issuer’s operating plan or from the valuation of a group of comparable public companies. Valuation analyses for pre-public, restricted investments are made no less than quarterly. Valuations are reviewed by the Valuation Committee of the Funds’ Board of Trustees and, ultimately, by the entire Board of Trustees.
Why do the Funds invest in biotechnology?
The Funds invest in all subsectors of healthcare. In particular, the portfolio manager of the Funds has, for some time, believed there is significant potential in the biotechnology sector. This sector has consistently produced novel products that have addressed unmet medical needs which have contributed to longer lives for patients and/or improved quality of life. At present, the Funds’ research team sees products in development that they believe have the potential to broadly improve the lives of patients AND provide an attractive return to shareholders.
Is the Net Asset Value per share (NAV) of a closed-end fund equal to its stock price?
No, the NAV is not usually equivalent to the stock price. The NAV is the total net assets of the fund divided by the number of outstanding shares of the fund. The stock price is the current price at which a willing buyer acquires stock from a willing seller on a stock exchange. Oftentimes, the shares of a closed-end fund trade at either a discount (where the stock price is below the NAV) or at a premium (where the stock price is above the NAV).
Why might a fund trade at a significant discount or premium?
There is no absolute consensus about what causes shares of a closed-end fund to trade at either a discount or premium. In our experience, particularly for a sector specific closed-end fund (like the Funds), the discount or premium at which shares of a closed-end fund trade is often an indicator of sector sentiment. When sentiment for a specific sector is positive, related sector-based closed-end funds can trade at a reduced discount or at a premium. In contrast, when sentiment is negative, related sector-based funds can trade at a smaller premium or at a discount.
What is the Management Fee?
Pursuant to the terms of the Advisory Agreement, the Fund pays the Adviser a monthly fee at the rate when annualized of (i) 2.50% of the average net assets for the month of its venture capital and other restricted securities up to 25% of net assets and (ii) for all other net assets, 0.98% of the average net assets up to $250 million, 0.88% of the average net assets for the next $250 million, 0.80% of the average net assets for the next $500 million and 0.70% of the average net assets thereafter. The aggregate fee would not exceed a rate when annualized of 1.36%.