Ageing populations across the world are giving rise to what could be one of the most lucrative-long investment opportunities in the healthcare sector, according to Seven Investment Management’s Terence Moll.
The 7IM investment strategy head said that in 30 years’ time 2 billion people will be aged 65 or over, with global demand likely to rise exponentially.
“As people age, they spend more and more on healthcare, so the long-term dynamics are effectively set in stone,” said Moll.
In 1950, said the strategist, the average person worldwide could expect to live until the age of 46. By 2019, this had risen to 73.
In Italy, which has the lowest birth rate in Europe, one in five people is already above the age of 65.
Indeed, Schroders fund manager John Bowler noted recently that developed markets spend between 10-12 per cent of their GDP on healthcare and is expected to rise in the coming years.
Source: Schroders
“Healthcare companies are well positioned for the long term to benefit from ageing populations, particularly in the developed markets, as well as in emerging markets,” added Moll.
In emerging markets, 7IM’s Moll said, the opportunity set may be even greater particularly as these fast-growing economies get richer.
“We are seeing more demand from the middle classes in countries like China, India and Indonesia for the best drugs, nursing homes and health insurance products,” he explained.
As such, it remains a core theme within its own portfolios with the recent addition of the offshore AllianceBernstein International Health Care Portfolio run by Vijay Thunar, who Moll said has a “great track record” in the sector.
“Thunar knows about the science involved and has an excellent understanding of the business which is crucial to ensure that he buys companies that will grow and pay dividends,” the strategist added.
The $871.8m four FE fundinfo Crown-rated fund was launched in 1995 and over the past 10 years has made a total return of 232.3 per cent, although it has underperformed the MSCI World Health Care index (250.11 per cent). It has an OCF of 1.21 per cent.
Nevertheless, the sector does face its challenges.
One short-term risk comes from the US and upcoming presidential elections that often pit polarised views of the sector against each other, creating uncertainty about the operating and regulatory environment.
FundCalibre managing director Darius McDermott said campaign issues such as drug pricing and health insurance can be vote winners in the US but can impact the largest healthcare market in the world.
However, McDermott said ageing populations are a global issue and companies that can provide solutions for governments could be the real winners.
He explained: “Governments around the world are chasing the holy grail of giving more healthcare to more people for less money, as populations age and people live longer with medical needs.”
One fund, McDermott recommended was the £304.4m Polar Capital Global Healthcare Trust, which invests almost 75 per cent of its portfolio in North American companies.
Run by Gareth Powell and deputy manager James Douglas, McDermott said the trust focuses on four sub-sectors: pharmaceuticals, biotechnology, medical technology, and healthcare services.
“We like the fact that the portfolio is split into two segments: growth and innovation with a circa 90/10 split,” said the fund picker. “The growth element is made up of predominantly larger companies – but mainly those that are proactive in driving change – whereas the innovation pot will invest into medium and smaller companies that have the potential for greater growth in the long run.
"These innovation companies are typically disrupters of conventional medical practises, mainly driven by structural transformation and employment of technology, to deliver the holy grail of better healthcare for less money.
He added: “The overall risk of the portfolio is mitigated by ensuring a diversified portfolio of stocks by factors such as geography, industry sub-sector and investment size.”
Performance of trust vs sector & index over 5yrs
Source: FE Analytics
The fund has underperformed over the past five years compared to the sector and index, making returns of 42.33 per cent against the IT Biotechnology & Healthcare sector’s 58.90 per cent and the MSCI ACWI/Health Care index’s 57.46 per cent.
The trust is currently trading at a 12 per cent discount to net asset value (NAV) and is 6 per cent geared. It has ongoing charges of 0.93 per cent.
Another fund highlighted by FundCalibre’s McDermott was a slightly different strategy: the £1.8bn Comgest Growth Japan fund. Run by Chantana Ward, Richard Kaye and Makoto Egami, the strategy invests in a concentrated 30-40 stock portfolio with a strong focus on the ageing population theme in Japan.
Healthcare is a key sector for investors in the Japanese economy given the ageing population, which has led to a number of medical problems. Holding Sysmex Corporation – a global leader in the field of diabetes testing – is one such company well-placed to fulfil a real and growing need.
The ageing demographic is also important because of its impact on the size of the Japanese working population, which has led to another play in the portfolio with the holdings such as recruiters Recruit Holdings and Persol Holdings.
Performance of fund vs sector & index over 5yrs
Source: FE Analytics
The fund has made returns of 96.82 per cent over the past five years, outperforming both the TSE TOPIX GTR index (46.59 per cent) and the IA Japan sector’s 46.44 per cent. The fund has an OCF of 0.89 per cent.