Healthcare: Investing in Innovation

As other sectors fall, innovation and technology are helping healthcare to rise above them all.

Article updated: 19 August 2020 8:00am Author: Tom Rosser

Although traditionally regarded as defensive, the health theme and the healthcare industry is now at the forefront of technological innovation and provides investors with exciting growth opportunities throughout the market cycle. In the long-term, this growth continues to be driven by ageing populations and the rising prevalence of chronic diseases.

However, the recent outbreak of Covid 19 has thrown a new spotlight on the industry, reinvigorating interest and accelerating activity within a number of sub-sectors involved in researching, containing and treating the virus.

Healthcare spending currently accounts for 10.5% of global GDP with the industry expected to grow at an annual rate of 5% per year, eventually reaching a global market value of $15 trillion by 2028. Mergers & acquisitions remain a key theme driving expansion in the industry with 2019 representing the highest year on record for deal making.

Good Health and Wellbeing forms one of the 17 UN Sustainable Development Goals (SDGs) and as such has led to a lot of emphasis being made toward increasing life expectancy and reducing some of the common killers. However, a lot of further work and investment is needed as less than half the global population is covered by essential health services* and almost 100 million people a year fall into extreme poverty due to health expenses.*

The healthcare sector is genuinely diverse, offering a multitude of opportunities for investors. There are companies involved in a broad array of fields such as medical devices, pharmaceuticals, life sciences and biotechnology. The fundamentals for the sector look to be pretty robust with good sales and earnings strength compared to other sectors.

Looking forward, risks stemming from the complex regulatory landscape in the US, which represents nearly half of global healthcare spending, have been subdued somewhat with supportive policies from both presumptive candidates - allowing momentum within the industry to be sustained.

Moving further afield, Asia continues to represent one of the fastest growing regions in global healthcare where an emerging middle class is increasing the demand for medical advancement and addressing the big inequities in access to care in emerging economies.

Taking a global approach may therefore be the best in seeking to get the most out of the health theme. Below are some of our suggestions of how investors can gain access to many of the top healthcare companies:

Polar Capital Healthcare Opportunities

The fund benefits from a very strong team of managers who collectively have over 120 years’ experience between the five of them. They invest in a globally-diversified portfolio of companies, seeking out those with sustainable cash flow and earnings growth. Within the fund there is a blend of large and smaller companies with broad exposure given to a variety of industries such as biotechnology, pharmaceuticals and healthcare equipment.

There is a bias towards larger companies who tend to be leaders within their field, adapting to and driving change, while the small and mid-sized portion lends itself to those companies at the forefront of innovation and growth. Performance has been strong on an absolute basis with the fund generating annualised returns of 9.5% over five years; however relative to the benchmark it has underperformed during this timeframe. Though over 10 years, the fund would have turned a £10,000 investment into nearly £59,000 – outperforming the benchmark and demonstrating the longevity of the health theme as well as this fund’s capabilities.

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Schroder Global Healthcare

The fund invests in healthcare and medical related companies on a global basis with the experienced manager seeking to benefit from strong themes such as biotechnology, gene drug manufacture and supply, pharmaceuticals, health insurance and hospital supplies. It has a broader geographical exposure compared to the Polar Capital fund with c. 58% invested in the US and c. 28% invested in Europe.

It has managed to outperform its benchmark the MSCI ACWI/Health Care over one, three, five and 10 years. These are impressive figures, made all the more remarkable considering the fund generally uses a lower level of risk. As a result, it has displayed strong risk adjusted returns and impressive defensive qualities in light of the recent equity market sell-off.

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L&G Global Health & Pharmaceuticals Index Trust

This passive fund aims to track the performance of the FTSE World Index Healthcare and is suitable for investors wanting cost effective exposure to health, pharmaceuticals and biotechnology companies. With an ongoing charge figure (OCF) of 0.31% the fund is almost three times cheaper than the Schroder fund and nearly four times cheaper than the Polar Capital fund.

The tracking index is mainly comprised of large companies with the majority located in the US (62.9%), yet the index also gives reasonable exposure to the likes of Switzerland, Japan and the UK. The fund is certainly a good option for cost-conscious investors as performance has largely been in-line with the active strategies mentioned previously.

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* (United Nations, 2020)
*(World Economic Forum, 2019)

All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

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Tom Rosser

Investment Research Analyst

Tom holds a BSc Economics degree and an MSc Investment Management degree, and has passed both CFA Level l and CFA Level ll. He joined The Share Centre in September 2018 on the graduate scheme and is now an Investment Research Analyst on the fund research team. As well as being a fund commentator, Tom also comments across equities and other asset classes.