Luthman, who co-manages Liontrust Macro UK Growth and Liontrust Macro Equity Income, says he has upped his exposure to the sector recently as he thinks its earnings will multiply due to the spending power of the developing emerging market middle class.
He thinks pharmas should now be considered as a major growth sector and can no longer be viewed as the leading defensive industry. "The common market perceptions of pharmaceuticals are that it is a very mature market with low growth and no pricing power, along with high litigation risks," he said at Liontrust's annual investment conference yesterday.
"However, in reality the global population is expanding and eventually everyone will eventually get sick and die, unfortunately."
"On top of this, more and more people can afford access to medicines."
"Pharmaceutical companies are well aware of this developing trend and are broadening their focus into different areas, like emerging markets."
"However, this is not just a geopolitical shift as these companies are also changing their business models."
"They are moving from subscription medication to lifestyle goods, because there is a demand for us all to look healthier and younger."
"What was once profitable becomes even more profitable when these companies are branching into different areas of the market," he added.
Luthman believes the pharmaceutical sector will follow in the footsteps of the tobacco industry, which has had a stellar 10 years of returns.
"The question is; how big is this theme?" he asked. "The interesting thing is we have all seen this film before, but with a different actor."
"The tobacco industry had a similar transformation of business models along with the same investor perception as pharmaceuticals."
"The sector was also seen as a mature market with low growth potential and high litigation risk."
"In 2004, many of the major tobacco companies undertook a similar change and re-orientated their products towards the emerging markets."
"The best way of seeing how this shift helped the sector is comparing it to mines and banks – two infamously powerful sectors."
He added: "Boring old tobacco has absolutely battered them. I think if there was a purely tobacco-focused fund in the market, it would have wiped the floor with its competition."
According to FE Analytics, the tobacco sector has seen very high and steady returns over the last decade.
Performance of indices over 10-yrs
Source: FE Analytics
The FTSE 350 Tobacco index has returned a stellar 521.68 per cent over the last 10 years, considerably outperforming the FTSE 350 Mining and FTSE 350 Banks indices, which have returned 382.59 per cent and 10.48 per cent, respectively.
Luthman continued: "I think we will see a very similar transition with pharmaceuticals, but nothing as yet has been transformed into the markets."
"This seems ridiculous, particularly when the sector is turning to the emerging market growth theme plus a re-orientation of their products."
Healthcare is the largest sector weighting in both of Luthman’s Liontrust Macro UK Growth and Macro Equity Income funds, making up 23.26 per cent and 19.68 per cent of the portfolios, respectively.
Large multinational pharmaceutical companies such as GlaxoSmithKline, Reckitt Benckiser and AstraZeneca are all major holdings in his equity income fund.
One of the highest-profile admirers of the pharma sector is Neil Woodford, whose Invesco Perpetual High Income fund has 34.28 per cent in healthcare. AstraZeneca and Glaxo alone have a 17.2 per cent weighting in the portfolio.
Luthman has run the £280m Liontrust Macro Equity Income with Jaime Clark and fellow FE Alpha Manager Stephen Bailey since the fund’s launch in October 2003.
Over that time it has returned 140.84 per cent. This beats both its benchmark – the FTSE All Share – and the IMA UK Equity Income sector, which have returned 109.51 per cent and 95.57 per cent, respectively.
Performance of fund vs sector and index since launch
Source: FE Analytics
Liontrust Macro Equity Income, which is currently yielding 3.35 per cent, has a total expense ratio (TER) of 1.56 per cent and requires a minimum investment of £1,000.