Will healthcare drive the next bull market?

It’s a sector which is always going to grab a significant amount of attention, but the spotlight is now shining brighter than ever on healthcare, as the search for a vaccine remains the world’s top priority.

And, as we head into a recession – probably like none other any of us have seen in our lifetimes – will we find that when we emerge the other side, it is healthcare companies leading stock markets higher?

The past decade saw the MSCI World/Health Care Index rise by some 301.7%, compared with 164.1% for the broader MSCI World Index*. And there are plenty of reasons to think this outperformance could continue.

For starters, the sector tends not to be economically sensitive, as there is always a demand for new medical products and services. The sector also had a lot of tailwinds before this pandemic which support long-term structural growth: ageing populations and the rise of the middle-class in emerging markets all indicate demand for drug treatments and medical supplies will increase exponentially.

More than just pharma companies

The MSCI World Index represents large and mid-cap companies across 23 developed market countries. The healthcare sector now accounts for 14.6% of the index, second only to the information technology sector (19.6%)**.

Many will associate the sector with large pharmaceutical companies, but it is home to numerous offerings of varying sizes. A good example is the biotech sector, which has taken on the mantle of developing drugs from the large pharma companies, who in turn will typically buy and patent those drugs. You also have medical services, managed care, life sciences & tools and hospitals to name a few.

Here are a few fund/trusts investors may want to consider.

Specialist vehicles

The Polar Capital Global Healthcare Trust focuses on companies in the pharmaceuticals, biotechnology, medical technology and healthcare services areas. Discussing the current outlook for the sector, co-manager James Douglas said: “In terms of near-term sentiment within healthcare, there is optimism towards the more defensive areas. These include large-cap pharmaceuticals and large-cap biotechnology, which as a collective have strong balance sheets, good cashflow conversion and, where applicable, secure dividend yields.

“Areas where sentiment collapsed during March include medical devices and healthcare facilities due to the delays in non-urgent procedures at hospitals. Small and mid-caps were also hit hard due to perceived higher risk.

“On a one and three-year view, areas hit hardest with the worst sentiment offer compelling returns. Assuming some kind of resumption to normality over those timeframes, medical devices, healthcare facilities and small/mid-cap stocks in areas such as biotech screen as highly compelling.”

Small and micro-cap funds

Healthcare investing is not purely the domain of global giants, with many smaller companies also accessing the sector. The TB Amati UK Smaller Companies fund currently has 11.4%*** in the sector, including the likes Dechra Pharma and Oxford Biomedica.

Fund manager Dr Paul Jourdan said recently that history shows we tend to spend the next decade trying to solve the previous crisis – as was the case with banks following the credit crunch. This is why he feels healthcare will be more important in the next decade than it was going into the crisis.

The Liontrust UK Micro Cap fund also has a 14.9%*** allocation to the healthcare sector. This exposure includes the likes of Bioventix, which manufactures and supplies high affinity sheep monoclonal antibodies (SMAs) for use in diagnostic applications such as clinical blood testing. Another holding is Medica Group, which is a market leader in the provision of teleradiology services, such outsourced reporting of X-ray, MRI and CT scans.

Income funds

A number of traditional UK equity income funds also have allocations to the healthcare sector, such as the Threadneedle UK Equity Income fund, which has a 17.9%*** position. The fund’s largest holding is global pharma business AstraZeneca (10.8%)*** which has a portfolio of products for major disease areas including cancer, cardiovascular, gastrointestinal, infection, neuroscience, respiratory and inflammation.

Global funds

Baillie Gifford Global Discovery fund has a strong focus on innovation and currently has an 41.8% allocation to healthcare***. The manager cites telemedicine company Teladoc (5.2%) and Alnylam (5.9%)*** – a biotech company that is developing a new class of drugs based on RNA interference – as two holdings he has particularly high conviction in.

Commenting on Teladoc, the manager said: “We recognised the potential of telemedicine to be beneficial for all parties – saving patients’ and doctors’ time and reducing costs for payers (insurers and employers). Recently, due to the Coronavirus, demand for the service has rocketed, with daily consultations doubling over March. Teladoc estimates that 60% of their consultations over this period were for new users. We believe this period could be transformational for long-term adoption. Circumstances are bringing many new users to the platform, forcing them to overcome the challenging first-time adoption hurdle and hopefully creating lasting behavioural change.”

*Source: FE Analytics, total returns in sterling, 6 May 2010 to 6 May 2020
**Source: MSCI World Index (USD) April 2020
***Source: Fund factsheet, 31 March 2020

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