Healthcare has been an important sector over the past year as the world has battled with Covid-19, but its stock market returns have failed to match its real-world importance.
Despite the goodwill built up by the rapid response to the pandemic, healthcare stocks struggled over the past 12 months. The MSCI World Healthcare index has made investors just 9.9%, less than half the 22.5% return of the wider MSCI World.
Fortunately for investors, performance over the longer term has been exceptional. Indeed, over the past decade, the MSCI World Healthcare index has outpaced the MSCI World by 80 percentage points, returning 308.6%.
Total return of the MSCI World Healthcare and MSCI World indices over 10yrs
Source: FE Analytics
This strong performance launched the BB Healthcare trust into the FTSE 250 index this week, but market experts believe there is far more to run for the healthcare sector.
Markuz Jaffe, an investment companies analyst at Peel Hunt, said the advancements in technology were facilitating the development of novel treatments at an increasing pace, creating fresh revenue streams for companies that should be beneficial over the coming years.
“The supportive backdrop provided by an increased global awareness on healthcare spend in the wake of the pandemic and the FDA’s [US Food and Drug Administration] increased approval rate of new drugs in recent years has helped to accelerate the pathway to commercialisation for novel treatments,” he said.
Jaffe saidBB Healthcare would be his pick for more general equity healthcare exposure. The trust has an ongoing charges figure (OCF) of 1.1%.
Total return of BB Healthcare against its peers and benchmark over 10yrs
Source: FE Analytics
“Healthcare is a sector where a specialist approach can be beneficial for several reasons including the complexity of the technology and treatments, the depth of opportunity available to investors across the various sub-sectors and the high-growth profile that can merit inclusion within a portfolio as a standalone holding,” he said.
Rob Morgan, chief analyst at Charles Stanley Direct, agreed that the long-term prospects of the healthcare sector were good.
“Although the technology sector tends to get the most attention from investors looking for growth opportunities, healthcare is a similarly innovative area exposed to some exceptional, enduring trends,” he said.
“What’s more, it appears to be fairly cheap considering the potential growth on offer, which is primarily a result of some political fog in the US that may, at some point, clear.”
Valuations across the sector are at lows levels versus the broader market and are not far off 2008 levels, when the market was concerned that drug pricing controls would reduce profitability and stifle growth with the introduction of ‘Obamacare’.
“Similar concerns hang over the market today with president Joe Biden keen to reform the US healthcare system, yet a rapid repricing of drugs or other major reforms such as the increased socialisation of the US healthcare system look like they will be kept in check by political division,” said Morgan.
On a positive note, the rising patient numbers – the world is expected to have 1 billion more elderly people by 2050 – and an increasing in spending as more people move into the middle class should be a boon for drug companies.
He also agreed that specialist exposure to the sector was certainly worth considering, but said the Worldwide Healthcare trust stood out among its peers.
The trust has been managed by New York-based OrbiMed Capital for nearly 25 years – the largest dedicated healthcare investment firm in the world.
The portfolio comprises a combination of pharmaceutical majors such as Bristol-Myers Squibb, Merck and AstraZeneca, broad healthcare companies such as United Health, device manufacturers and smaller, innovative firms.
Carly Moorhouse, fund research analyst at Quilter Cheviot, also threw her backing to the £2.6bn Worldwide Healthcare trust.
“There are benefits to investing in healthcare through both open-ended and closed-ended vehicles, such as investment trusts. If the mandate of the portfolio manager is to find high growth, cutting edge biotech firms, then the portfolio will most likely be centred around small-mid cap, often private companies, that can be extremely volatile. In which case, this lends itself more to the investment trust structure,” she said.
The trust has a strong track record, beating both the MSCI World Healthcare index and its average peer by 150 and 31 percentage points over the past decade on its way to a 458.3% return.
Total return of Worldwide Healthcare against its peers and benchmark over 10yrs
Source: FE Analytics
“It has a large overweight to biotech in emerging markets which we see as a key differentiator as well as an area that we have an increasingly positive view on and we believe the core, style-agnostic investment approach provides attractive exposure to assets within the Healthcare sector for long-term investors,” she said.
However, the fund, which has an OCF of 0.87%, does have a performance fee equivalent to 15% of any outperformance of the benchmark index. Last year investors paid 2.37% in total.