How to profit from the ageing population in the West
While many investors in the UK look to take advantage of the growing middle class in emerging markets, they may be overlooking an equally lucrative demographic shift that is taking place much closer to home.
Pharmaceuticals and biotechnology offer a method of profiting from long-term demographic trends in the West that are usually taken to be negative for economic growth, according to Daniel Mahoney, manager of the Global Healthcare Growth and Income Trust.
However, investors who think that they can get exposure to biotech by holding GlaxoSmithKline or AstraZeneca in their UK funds are missing out on the full potential of the sector, he added.
An ageing population means that not only does the West face increasing pressure to improve the quality of healthcare for the elderly, but also that there are huge profits to be made in providing efficiencies to cash-strapped governments.
"If you could cut the costs of Alzheimer’s for example, if you could find a way to allow people with the condition to live at home and cut that dependency on the healthcare budget, that would be an enormously valuable product or service," Mahoney said.
"Value now in the healthcare sector means cutting costs and improving outcomes, not just hitting targets."
The Global Healthcare Growth and Income Trust was launched in 2010, making it the youngest of the four trusts in the IT Biotechnology and Healthcare sector.
Performance of trust since launch
Source: FE Analytics
The other three portfolios focus on "traditional" biotech investments – companies researching and producing new drugs – but Mahoney’s fund has a broader remit, looking also for companies that are providing IT efficiencies, for example.
"There’s more to healthcare than just medicine," he said. "We look for companies that can deliver better healthcare for less."
"Cutting costs is primary as that’s the cost that governments have right now. With IT, for example, the healthcare industry is behind the times."
"GPs are only now looking into providing online systems for booking appointments – the technology more or less exists, so there are easy profits there for the person who builds the system."
"Over the next decade we are going to see the 'consumerisation' of healthcare, driven by the government’s need to cut costs. More services will be provided in Boots rather than the hospital and we are going to be more responsible for our own treatments."
The IT Biotechnology and Healthcare sector has a remarkable record of growth over the past two decades, although the early years of the data reflect the performance of just three portfolios.
Despite a huge boom and bust in the sector around the time of the dotcom crash in the early years of this century, it has grown by 559.93 per cent since 1995, when the first fund in the area was launched.
Performance of sector vs index over 5-yrs
Source: FE Analytics
It has risen by 216.86 per cent in the past 10 years and Mahoney claims that this outperformance is supported by demographic trends, making another boom and bust unlikely.
The best performer in the field is the Biotech Growth Trust
, which has made 408.56 per cent over 10 years, and comes out top of the pile on every period from 10 years to one month.
Mahoney also invests in drug companies, and David Pinniger, manager of the International Biotechnology Trust
, claims there are still exceptional gains to be made in such traditional biotechnology investments.
"The pace of innovation is increasing," he commented. "In the 90s it was true that the productivity of R&D, how often it translated into new products, was declining, but that trend has reversed."
He also said the world may be beginning on a new super-cycle of biotechnological advancement similar to the industrial revolution, the development of the railways and the IT boom that started in the 1980s.