Market risks |
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By the nature of its activities and Investment Objective, the Company’s portfolio is exposed to fluctuations in market prices (from both individual security prices and foreign exchange rates) and due to exposure to the global healthcare sector, it is expected to have higher volatility than the wider market. As such investors should be aware that by investing in the Company they are exposing themselves to market risks and those additional risks specific to the sectors in which the Company invests, such as political interference in drug pricing.
In addition, OrbiMed’s approach is expected to lead to performance that will deviate from that of comparators, including both market indices and other investment companies investing in healthcare.
The Company also uses leverage (both through derivatives and gearing) the effect of which is to amplify the gains or losses the Company experiences. |
To manage these risks the Board and the AIFM have appointed OrbiMed to manage the portfolio within the remit of the investment objective and policy, and imposed various limits and guidelines. These limits ensure that the portfolio is diversified, reducing the risks associated with individual stocks, and that the maximum exposure (through derivatives and an overdraft facility) is limited. The compliance with those limits and guidelines is monitored daily by Frostrow and OrbiMed and reported to the Board monthly.
In addition, OrbiMed reports at each Board meeting on the performance of the Company’s portfolio, which encompasses the rationale for stock selection decisions, the make-up of the portfolio, potential new holdings and, derivative activity and strategy (further details on derivatives can be found in note 16).
The Company does not currently hedge its currency exposure. |
Geopolitical/regulatory and macro economic risk |
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Macro events may have an adverse impact on the Company’s performance by causing exchange rate volatility, changes in tax or regulatory environments, and/or a fall in market prices. Emerging markets, which a portion of the portfolio is exposed to, can be subject to greater political uncertainty and price volatility than developed markets. |
While such events are outside the control of the Company the Board reviews regularly, and discusses with the Portfolio Manager, the wider economic and political environment, along with the portfolio exposure and the execution of the investment policy against the long-term objectives of the Company. The ongoing tensions in the Asia Pacific Region and also the instability caused by the war in the Ukraine have featured in these discussions. The Portfolio Manager’s risk team perform systematic risk analysis, including country and industry specific risk monitoring.
The Board monitors regulatory developments but relies on the services of its external advisers to ensure compliance with applicable law and regulations.
The Board has appointed a specialist investment trust AIFM and Company Secretary who provides industry and regulatory updates at each Board meeting. |
Unquoted investment risk |
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The Company’s risk could be increased by its investment in unquoted companies. These investments may be more difficult to buy, sell or value, so changes in their valuations may be greater than for listed assets. The valuation of unquoted investments requires considerable judgement as explained in Note1(a) and as such realisations may be materially lower than the value as estimated by the Company. Particular events, outside the control of the Company, may also have a significant impact on the valuation and considerable uncertainty may exist around the potential future outcomes for each investment. |
To mitigate this risk the Board and AIFM have set a limit of 10% of the portfolio, calculated at the time of investment, that can be held in unquoted investments and have established a robust and consistent valuation policy and process as set out in Note 1(b), which is in line with UK GAAP requirements and the International Private Equity and Venture Capital (“IPEV”) Guidelines. The Board also monitors the performance of these investments compared to the additional risks involved. |
Investment management key person risk |
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There is a risk that the individuals responsible for managing the Company’s portfolio may leave their employment or may be prevented from undertaking their duties. |
The Board manage this risk by:
· appointing OrbiMed, who operate a team environment such that the loss of any individual should not impact on service levels;
· receiving reports from OrbiMed at each Board meeting, such report includes any significant changes in the make-up of the team supporting the Company;
· meeting the wider team, outside the designated lead managers, at OrbiMed’s offices and encouraging the participation of the wider OrbiMed team in investor updates; and
· delegating to the Management Engagement & Remuneration Committee responsibility to perform an annual review of the service received from OrbiMed, including, inter alia, the team supporting the lead managers and succession planning. |
Counterparty risk |
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In addition to market and foreign currency risks, discussed above, the Company is exposed to risk arising from the use of counterparties. If a counterparty were to fail, the Company could be adversely affected through either delay in settlement or loss of assets.
The most significant counterparty the Company is exposed to is J.P. Morgan Securities LLC which is responsible for the safekeeping of the Company’s assets and provides the overdraft facility to the Company. As part of the arrangements with J.P. Morgan Securities LLC they may take assets, up to 140% of the value of the drawn overdraft, as collateral and have first priority security interest or lien over all of the Company’s assets. Such assets taken as collateral may be used, loaned, sold, rehypothecated or transferred by J.P. Morgan Securities LLC. Although the Company maintains the economic benefit from the ownership of those assets it does not hold any of the rights associated with those assets. Any of the Company’s assets taken as collateral are not covered by the custody arrangements provided by J.P. Morgan Securities LLC. The Company is, however, afforded protection in accordance with SEC rules and U.S. legislation equal to the value of the assets that have been rehypothecated.
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This risk is managed by the Board through:
· reviews of the arrangements with, and services provided by, the Depositary and the Custodian and Prime Broker to ensure that the security of the Company’s assets is being maintained. Legal opinions are sought, where appropriate, as part of this review. Also, the Board regularly monitors the credit rating of the Company’s Custodian and Prime Broker;
· monitoring of the assets taken as collateral (further details can be found in note 16);
· reviews of OrbiMed’s approved list of counterparties, the Company’s use of those counterparties and OrbiMed’s process for monitoring, and adding to, the approved counterparty list;
· monitoring of counterparties, including reviews of internal control reports and credit ratings, as appropriate;
· by primarily investing in markets that operate DVP (Delivery Versus Payment) settlement. The process of DVP mitigates the risk of losing the principal of a trade during the settlement process; and
· J.P. Morgan Securities LLC is subject to regular monitoring by J.P. Morgan Europe Limited, the Company’s Depositary, and the Board receives regular reports from J.P. Morgan Europe Limited. |
Service provider risk |
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The Company is reliant on the systems of its service providers and as such disruption to, or a failure of, those systems (including, for example, as a result of cyber-crime or a ‘black swan’ event) could lead to a failure to comply with law and regulations leading to reputational damage and/ or financial loss. |
To manage these risks the Board:
· receives a monthly compliance report from Frostrow, which includes, inter alia, details of compliance with applicable laws and regulations;
· reviews internal control reports, key policies, including measures taken to combat cyber security issues, and also the disaster recovery procedures of its service providers;
· maintains a risk matrix with details of risks the Company is exposed to, the controls relied on to manage those risks and the frequency of the controls operation;
· receives updates on pending changes to the regulatory and legal environment and progress towards the Company’s compliance with these; and
· has considered the increased risk of cyber-attacks and received reports and assurance at meetings with its service providers where the information security controls in place were reviewed. |
ESG related risks |
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Both the Board and the Portfolio Manager recognise the importance of having a coherent ESG policy. There is a risk that investing in companies that disregard ESG factors will have a negative impact on investment returns and also that the Company itself may become unattractive to investors if ESG is not appropriately considered in the Portfolio Manager’s decision making process. |
The Portfolio Manager provides ESG reports at each Board meeting, highlighting examples where ESG issues influenced investment decisions and/or led to engagement with an investee company. The Portfolio Manager also produces a quarterly ESG update.
The Board ensures that the Portfolio Manager’s ESG approach is in line with standards elsewhere and the Board’s expectations. A summary of the Portfolio Manager’s approach to Responsible Investing can be found in the Strategic Report. |
Shareholder relations and share price performance risk |
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The Company is also exposed to the risk, particularly if the investment strategy and approach are unsuccessful, that the Company may underperform resulting in the Company becoming unattractive to investors and a widening of the share price discount to NAV per share. Also, falls in stock markets and the risk of a global recession, are likely to adversely affect the performance of the Company’s shares. |
In managing this risk the Board:
· reviews the Company’s Investment Objective in relation to market, and economic, conditions and the operation of the Company’s peers;
· discusses at each Board meeting the Company’s future development and strategy;
· reviews the shareholder register at each Board meeting;
· actively seeks to promote the Company to current and potential investors; and
· has implemented a discount/premium control mechanism.
The Board undertakes a regular review of the Company’s share price compared to the NAV per share. Further information can be found in the Business Review. Company promotional activities have been delegated to Frostrow, who report to the Board at each Board meeting on these activities. |