In the UK Equity Income & Growth sector AstraZeneca is now in a whopping 84 per cent of portfolios, a rise of more than 15 per cent on three months ago. Even fixed income portfolios have been buying: the Pfizer 6.5 per cent 03/06/38 is in close to nine per cent of IMA Sterling Corporate bond portfolios.
There will be questions against this, particularly in light of the varying performances of portfolios mandated to be heavily or wholly exposed to the sector.
Consider the Directors Dealing Investment Trust – formerly Eaglet Investment Trust – which has more than 38 per cent weighted to healthcare including healthcare equipment and services, pharmaceuticals and biotechnology. In the year, to 16 September the fund returned close to 35 per cent – clearly better than the FTSE All Share, 7.4 per cent, FTSE 100, 6.7 per cent, and the MSCI The World index, 2.2 per cent or indeed its benchmark UK Smaller Companies index, 0 per cent.
However, AXA Framlington Health, which has been around since 1987, returned half a per cent over the year, while the Polar Capital Healthcare Opportunities returned -10.4 per cent and the Bluehone AIM VCT 2 dropped -43 per cent - it has a 24 per cent weighting to healthcare.
Outperformance vs underperformance
Source: Financial Express Analytics
Source: Financial Express Analytics
Throw in the uncertainty sparked by the Obama administration’s efforts to reform healthcare policy in the US, which is by far and away the key market influencing the sector because of the sheer proportion of GDP spent on relevant products and services, and retail investors may feel reticent towards increasing their exposure at this point.
But, there are factors arguing in favour of doing so.
One of these is valuations. In the US, the long-term de-rating of the sector against its own historical price/earnings peaks have seen it fall from a multiple of about 30x in December 2006 to about 17x by June 2009, according to data from Piper Jaffray. Compare that with the broader S&P 500, which saw its p/e go from about 17x in December 2006 to its current level somewhere north of 100x on the basis of reported earnings.
Gareth Powell, manager of the Polar Capital Healthcare Opportunities fund says that while pharmaceutical, biotech, medical technology and healthcare services p/e multiples lag the market, this could change in coming months.
What Powell calls "reform overhang", once removed, could encourage a rally of up to 20 per cent over the next three to six months. What the market is really waiting for are signals that a Bill will pass both Congress and the Senate, and get Obama’s signature. Expectations are that this will happen by December because next year sees mid-term elections in the US.
Samuel Isaly manager of the Finsbury Worldwide Pharmaceutical Trust in a note to investors recently sounded a similar upbeat note.
"We look forward this autumn to a potential resolution to the president Obama-led healthcare reform in the US. Healthcare stocks, especially in pharma and biotech, appear to be pricing in a worst case scenario, a scenario which we believe has almost zero chance of occurring. A strong late year rally is a distinct possibility."
Range of performances
Source: Financial Express Analytics
Trustnet Alpha Manager Felix Wintle, who manages the Neptune US Opportunities fund, which has a 20 per cent weighting to healthcare, says he has been positive on the sector for most of the year.
Like the others he too points to the healthcare debate in the US swinging decisively away from earlier policy proposals such as price caps on pharmaceutical products and a public insurance plan that would compete with the existing Medicare and Medicaid ones.
"One by one those things haven't happened," Wintle says, adding that the likes of pharmaceuticals were underperforming even two years before Obama got to the White House, because markets were pricing in a Democrat victory.
"Fear is leaving the sector," Wintle says, adding investors should at least consider a neutral weighting to the sector as far as their overall portfolios go.
Georgina Taylor, equity strategist at Legal & General echoes the stance of investors thinking about the level of exposure. She says that while sectors and stocks perceived as defensive have lagged the cyclical rally of the past 6-9 months, given current valuations, and given the prospects of M&A activity, investors could benefit both from the growth in biotech and medical technology, while also gaining some defensive backbone against any market disappointment from slower than expected economic growth going into 2010.