Five fund managers looking for ‘healthy’ profits

One of the virtues of the healthcare industry is its predictability. Selling essential, non-discretionary products such as syringes or saline drips means that health care companies are usually relatively immune to economic turbulence and can even do well during recessions.

Yet the pandemic tested conventional wisdom, with the postponement of all but the most essential procedures. Few could have predicted non-discretionary product categories such as pacemakers would have proved vulnerable to declining sales.

So, having far outpaced the wider global index over the past decade, with returns of more than 300%*, the MSCI World/Health Care Index has struggled over the last 12 months, returning 6.8%* vs 10.5%*.

Since the ‘vaccine rally’ at the end of 2020, however, things have started to look up once again for the sector. The ‘recovery trade’ seen in the wider market is being mirrored in healthcare, with sub-sectors most impacted by COVID – like hospitals, care providers and dental care – seeing a recovery in procedure/patient volume that is helping drive stock performance.

So what are the long-term prospects for the sector? Could it drive the next bull market as we suggested back in May?

A number of Elite Rated managers certainly think there are plentiful opportunities in the sector.

Five Elite Rated managers investing in healthcare

Alexander Darwall, manager of European Opportunities Trust, has almost a third (30.8%^) of the portfolio invested in healthcare companies. He told us: “Healthcare covers a vast array of therapies, technologies and activities. Though overall it is an attractive sector, not all sub sectors and not all companies are doing well. Selectivity is vital.

“For many healthcare companies the Covid pandemic has boosted demand. This is true of the diagnostics companies and those producing drugs like dexamethasone used for treating Covid. The bigger story, which helps explain why certain parts of healthcare are performing well, is that diseases are more global and more complicated. In response, the pharmaceutical industry now has genomics, gene therapies and theranostics (a combination of diagnostics and therapy).

“Two of our major investments at Devon benefit from some of these factors. BioMerieux, the French diagnostics company, has developed ‘gold standard’ Covid tests. Its wider portfolio of in vitro and molecular diagnostics meets the need for better outcomes: faster tests and more accurate diagnoses. For infections like pneumonia and meningitis, it is vital to diagnose and treat patients as quickly as possible. Novo Nordisk, a long-standing investment, is the world leader in the production of insulin and GLP-1 drugs which are used to treat diabetes and, increasingly, co-morbidities, notably obesity. Diabetes is a pandemic; the incidence of diabetes is increasing at about 5% per annum worldwide. Obesity is often a factor in diabetes so recognition that the new class of drugs, GLP-1, can treat both diabetes and reduce obesity is a massive development.”

Ben Griffiths, manager of T. Rowe Price European Smaller Companies fund, also has 18.9%^ invested in healthcare firms. He said recently, “Our biggest holding is Shop Apotheke, a German online pharmacy. The German market is still very much owned by single pharmacists. The pandemic has obviously helped accelerate adoption of online services and the German government has now also mandated electronic prescriptions. It’s exciting because it’s still such a young market – there is currently just 1% penetration for online prescriptions in Germany – it’s 30% in the US, so the potential is huge.”

You can watch the full interview with him here:

Comgest Growth Europe ex UK has had a consistently high exposure to quality growth companies in the healthcare sector for over two decades. The weighting is currently 27.4%** The manager commented: “Our healthcare exposure ranges from dental implant manufacturers such as Straumann, Orpea, the largest operator of nursing homes worldwide, hearing aids player Amplifon, Ambu in medtech, Research & Production outsourcing players like ICON or Lonza to blue chip drug companies like Novo Nordisk in diabetes and Roche in oncology.

“Orpea is strengthening its position in a fragmented sector. Over recent years it has expanded into Brazil and China. The demographic structural trend is what underpins its organic growth: the number of dependent people should grow 3-5% p.a. in every European country for the next 20 years, and the private sector will provide a disproportionate amount of this growth.

“However, careful stock selection remains key to successful investing in this. Risks such as regulation, capital intensity, innovation, competition and pricing remain key. We have found that companies who build strong franchises through a focus on a niche selection of products or services tend to outperform over the long term.”

Further afield, the JP Morgan China Growth & Income trust has 15.9%^ invested in the sector – almost 10% more than the index.

“As with many economies, the pandemic has accelerated a number of structural trends in China which were already underway,” the manager commented. “Even before the outbreak of Covid-19, China lacked adequately widespread diagnostics and healthcare facilities, and had shortages of broad-based vaccinations for illnesses such as the regular flu. As consumer expectations continue to rise, a focus on improving healthcare spending in China remains a clear structural trend for investors, especially in areas like outsourced clinical testing, diagnostics, and vaccinations.

“For example, the pandemic has shone a light on under-investment in hospitals where ICU beds represent just 5% of hospital beds vs 15%+ in developed markets. This provides structural growth for companies such as Shenzhen Mindray which is the largest medical equipment manufacturer in China with products which include ventilators and ICU monitors.”

Laurie Don, investment manager on the Liontrust Sustainable Investment team behind Liontrust Sustainable Future Global Growth says that while pharmaceutical companies are currently at the forefront of the public eye because of their urgent efforts against Covid-19, they invest in healthcare because the sector’s innovation is vital for a more sustainable future. The aforementioned fund has a 21.2%^ weighting to the sector.

“There are significant advances in technology across areas such as gene editing and DNA sequencing, and these are revolutionising how we think about treatment,” he said. “The traditional model has a large element of trial and error, with people seeking help when they feel ill and hoping whatever drug or procedure prescribed is effective – but this intervention often proves too late. In contrast, we are moving towards a more personalised system where we can understand how someone’s genetic make-up makes them vulnerable to certain diseases, and this is opening up new ways to counter conditions such as cancer, dementia and Parkinson’s.”

“A recent addition across our funds is US healthcare business Illumina, a global leader in sequencing for genetic analysis. The company’s ability to read and interpret a patient’s DNA is a core first step in the shift towards more personalised medicines. Illumina continues to lower the cost of gene sequencing over time, enabling broader adoption of these techniques and helping to accelerate further beneficial trends for patients, such as progress in liquid biopsy technology, for example, which allows doctors to detect cancerous cells from a blood draw rather than source tissue.”

*Source: FE fundinfo, total returns in sterling to 17 February 2021
^ Source: fund fact sheet, 31 December 2021
**Source: fund factsheet, 31 January 2021