For global equity investors, the 12-month period ended August 31, 2023, was a roller-coaster ride -- driven largely by shifting perceptions of whether the U.S. Federal Reserve (the Fed) could bring the world's largest economy in for a soft landing, and changing expectations of how long interest rates might remain high. As the period opened, stocks lost ground as persistently high inflation led the Fed to place a heavy foot on the U.S. economy's brake pedal by raising the federal funds rate 0.75% in September 2022. Meanwhile, Russia's cutoff of natural gas deliveries threatened both the quality of life and industrial production in Europe. Facing even higher inflation, the European Central Bank also announced its own 0.75% interest rate hike in September.
In October and November 2022, stocks rallied back on strong corporate earnings, attractive valuations, and hope that the Fed might slow the pace of its interest rate hikes. But in December, equities lost ground again as “higher for longer” interest rate fears returned. A continuing irony throughout the period was that good economic news -- record low unemployment, strong job creation, and robust consumer spending -- was viewed as bad news for inflation and fuel for further rate hikes that would weigh on stock prices. In January 2023, however, global equities began a rally that lasted through July. The initial tailwind was ChatGPT, an artificial intelligence (AI) application that led investors to perceive AI might become the next big innovation driving the information technology (IT) sector. As a result, one of the worst-performing sectors in 2022 -- IT -- became the standout sector of the first half of 2023. Earlier recession fears that had weighed on stock prices receded as many investors came around to the view that the U.S. and global economies were doing surprisingly well, and the Fed might actually bring the U.S. economy in for a soft landing.
European equities received an additional boost as feared continent-wide energy shortages failed to materialize during the winter. But in the final month of the period, the bond market halted the stock market's momentum. As it became increasingly clear the Fed would leave rates higher for longer than previously anticipated, longer term bond interest rates rose. Given the potential for relatively attractive returns with lower risk than stocks, many investors shifted from equity assets to bonds.
Stock prices ended on a down note as the period came to a close in August 2023. For the period as a whole, equity performance was strong. The MSCI ACWI Index, a broad measure of global equities, returned 13.95%; the MSCI EAFE Index of developed-market international equities returned 17.92%; and the S&P 500, a broad measure of U.S. stocks, rose 15.94%. While the global health care sector posted strong returns during the period -- with the MSCI World Health Care Index rising 10.09% -- it modestly lagged the broader global equity market, which was boosted by higher growth sectors, including IT and communication services. The period reflected a start in the normalization of health care activities -- including medical procedures and hospital visits -- following widespread disruptions during the COVID pandemic. The pharmaceutical industry delivered the best return within the sector due in part to strong sales of new weight loss drugs during the period.
Fund Performance
For the 12-month period ended August 31, 2023, Eaton Vance Worldwide Health Sciences Fund (Trades, Portfolio) (the Fund) returned 10.21% for Class A shares at net asset value (NAV), outperforming its benchmark, the MSCI World Health Care Index (the Index), which returned 10.09%. On an individual stock basis, the largest contributors to Fund performance versus the Index during the period were overweight positions in Eli Lilly & Co. (LLY, Financial) and Novo Nordisk A/S (NVO, Financial)(OCSE:NOVO B, Financial), as well as not owning Index component CVS Health Corp. (CVS, Financial). Eli Lilly is a global drugmaker specializing in diabetes, oncology, and immunology therapies. Its share price nearly doubled during the period, with the best performance occurring in August 2023 after the company reported strong second-quarter earnings driven in part by sales of the company's diabetes drug, Mounjaro.
Shares of Denmark-based Novo Nordisk, a pharmaceutical manufacturer focused on diabetes and obesity care, performed strongly on robust sales of the company's weight loss medicine, Wegovy. Not owning CVS, as it transitioned from a retail drugstore chain into a health care solutions provider, aided relative Fund returns as CVS' share price plunged during the period. An unfavorable rating of its Medicare Advantage product, along with the lowering of its near- and medium-term earnings projections, weighed on CVS' stock price. On an industry basis, stock selections in the pharmaceuticals and the health care equipment & supplies industries contributed to Fund performance versus the Index during the period.
In contrast, the largest individual stock detractors from Fund performance relative to the Index were an out-of-Index position in Agiliti, Inc. (AGTI, Financial); an overweight position in Centene Corp. (CNC, Financial); and an underweight position in Novartis AG (NVS, Financial). Agiliti, which rents and manages medical equipment for health care providers, saw its stock price drop late in the period as the company reported disappointing quarterly earnings and reduced future earnings projections. The company's highly profitable peak-need rental business had declined notably as health care activity normalized after the pandemic.
Centene is a managed-care provider that delivers services primarily to Medicaid and Medicare recipients. Its stock price declined after the company lost several contracts with California counties during that state's Medicaid renewal process, and investors became concerned about contract renewal prospects in other locales. The Fund sold its position in Swiss-based pharmaceutical firm Novartis early in the period. As a result, the Fund missed a jump in Novartis' stock price in March 2023 -- after the U.S. Food and Drug Administration approved a drug in which Novartis holds a significant ownership position, Joenja, a treatment for a rare genetic condition. On an industry basis, stock selections in the biotechnology and the health care providers & services industries, along with stock selections and an overweight position in the health care technology industry, detracted from Fund performance versus the Index during the period.
Past performance is no guarantee of future results. Returns are historical and are calculated by determining the percentage change in net asset value (NAV) or offering price (as applicable) with all distributions reinvested. Furthermore, returns do not reflect the deduction of taxes that shareholders may have to pay on Fund distributions or upon the redemption of Fund shares. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance for periods less than or equal to one year is cumulative. Performance is for the stated time period only; due to market volatility, current Fund performance may be lower or higher than the quoted return. For performance as of the most recent month-end, please refer to eatonvance.com.
