Investment Model Portfolios for Adviser Firms

+44 (0) 1954 234383

TwitterTwitterLinkedIn

Are your investments in good health?

Healthcare has been a mainstay of investing for generations, with pharmaceutical giants dominating UK indices and Johnson & Johnson and UnitedHealth constituting around £750bn in market capitalisation between them.

The healthcare sector’s growth in recent years demonstrates the impressive upward trajectory that it is on.  Between 2010 and 2018 investments in health increased in value by 186% and in pharmaceuticals and biotech by 232%.  The forecasts for the next 10 years show even larger potential growth, so it is easy to see why this is becoming an ever more relevant part of the investment landscape.

Today, the prospective opportunity is different to the previous decade’s and is especially exciting, mainly due to three main factors: demographics, the pressure on costs, and innovation.

Demographics

Most major developed nations now have an age problem.  Due to the post-war ‘Baby Boom’, the percentage of their populations that are over 65 is growing fast and depleting the labour force as it does.  By 2025 it is projected that around 20% of the US will be over 65.  It is perhaps no surprise then that healthcare spending is now over 17% of GDP in the US.  Fast-growing economies further afield are also contributing to increased healthcare usage too, as regions such as Asia especially, move toward more western (and less healthy) diets.  Demand for healthcare is high and it is increasing at a rapid rate.  This makes many healthcare assets excellent candidates to have accelerating earnings for years to come.

Cost

As we have seen, spending on healthcare in the US is growing and this a concern for many, meaning the lower-cost producers look more attractive as budgets come under pressure.  Drug pricing has been a political issue in the last few election cycles and access to affordable medications is becoming more of a priority for the government.  Investing in the best companies in these spaces could be very lucrative.

Innovation

Leaps forward in many areas of healthcare have provided opportunities in biotechnology, robotics, gene therapy, biosensors, fitness and many more.  In the last year we have seen how novel research has produced messenger RNA COVID-19 vaccines that are allowing us to emerge from the biggest health crisis in a century.  Innovation is occurring at an increasing pace and breakthroughs in numerous areas will perpetuate healthier societies.

Holding even a single healthcare-focused fund can provide significant diversification; for instance a fund can combine defensive pharmaceuticals with exciting early-stage biotechnology stocks to produce a fruitful portfolio that combines numerous growth factors and can be held for many years.

The average healthcare fund has provided investors with a healthy positive return each year for the last 10 years, with the most recent two full calendar years contributing over 20% in each.  We know that investments in some areas of medicine can be volatile but a fund that combines some of the more predictable companies with these can be a valuable asset to a diversified portfolio and may become a larger part of our portfolios in the future.