Martin, who runs the five crown-rated Neptune UK Mid Cap portfolio, says that the westernisation of the emerging world and potential M&A [mergers and acquisition] activity make mid and small cap healthcare companies one of the best places for investors to put their cash for the medium- to long-term. However, he says the option is also a good bet for anyone with a shorter-term horizon – particularly those worried about QE tapering.
"There are a number of reasons why we have a heavy overweight in mid and small cap healthcare stocks," Martin explained.
"Firstly, at Neptune we believe the US is in recovery mode and with Bernanke talking about tapering, we think that is a good thing as it shows the US central bankers are confident that it is a self-sustaining recovery."
"However, with the US ending QE, that should lead to a stronger dollar and one of the single biggest benefactors of a stronger dollar is the healthcare sector."
"On top of that, there is potential from much higher levels of M&A activity as corporates will take confidence from Bernanke’s message. Mid caps are usually a good place to be for periods of M&A, but specifically in the healthcare sector, as there are a lot of cash-rich, growth-poor mega-caps – such as AstraZeneca."
"In the mid and small cap spaces there are real growth-rich companies which are highly innovative. Some of these mega caps don’t have the growth potential but can use the significant cash on their balance sheets to acquire that innovation," he added.
Looking to the longer-term, he points to growing demand from the developing world as a reason to be optimistic.
Although emerging markets have seen slowing growth in recent years, he predicts they will remain a high-growth area and says this is another reason why the healthcare sector could be investors' best bet.
"A lot of these companies look to access emerging markets growth," he said.
"Though clearly there has been a wobble recently, the opportunity is still very much there. However, we might see a change of how to access that potential."
"It always used to be about miners, but actually the best way to play emerging markets is now through healthcare stocks as these economies move towards more consumption-led models."
"One of the best ways for the authorities to create such a model is to have a much better social security net. A Chinese family is more likely to spend more on consumption if they are happy that the government is providing good social security, for instance."
"One of the major reasons behind the recent riots in Brazil was because of the lack of social security reform, so there could potentially be huge healthcare reform in emerging markets," he added.
Martin points to the ageing population, increasing industrialisation and higher smoking rates in the developing world as yet more reasons to be optimistic in the longer-term.
Given that Consort Medical may be bought out by one of the bigger players in the market, Martin is backing the stock to deliver high returns.
Performance of stock vs index over 3yrs
Source: FE Analytics
According to FE Analytics, the stock has returned nearly 120 per cent over three years against the FTSE All Share’s 38.63 per cent, but Martin says that investors who buy now can expect to see similar gains in the future.
"The company manufactures an advanced inhaler for emphysema and asthma suffers," he said.
"This pump, which is FDA-approved, delivers a drug – which is manufactured by Glaxo – into a sufferer's lungs in a very specific way. Because it is regulated by the FDA, it means there are barriers to entry which helps the company's pricing power."
"For instance, it is very difficult for a company from China to replicate this pump."
"However, as we are seeing more and more industrialisation and increased incidents of smoking in emerging markets, then it is good news for Consort Medical as unfortunately there will be a growing amount of asthma and emphysema sufferers," he added.
Martin admits that that theme is a very long-term one; however he says Consort Medical also offers investors more short-term potential – namely its involvement in the e-cigarette market.
The manager says the company has begun a joint venture with British American Tobacco in which it is attempting to use the same drug-dispensing mechanism to deliver nicotine via e-cigarettes.
"This is a really exciting opportunity, but also the UK medical regulator announced that the e-cigarette market would be regulated from 2016 onwards," he explained.
"They are currently untaxed and there are lots of providers, but once regulation comes in, then there will be fewer players, which will be very good for Consort Medical’s market share as the management team has a good record of dealing with regulators," he added.
Our data shows that there is only one fund in the IMA universe that counts Consort Medical as a top-10 holding, which is Schroder Institutional UK Smaller Companies, run by the FE Alpha Manager duo of Rosemary Banyard and Andrew Brough.
However, as the name suggests, it is not available to retail investors.
Martin has managed the £115m Neptune UK Mid Cap fund since its launch in December 2008.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
FE Analytics shows that the five crown-rated fund has been the best performer in the IMA UK All Companies sector over three years with returns of 99.19 per cent, beating its benchmark – the FTSE 250 ex ITs – by more than 30 percentage points.
Neptune UK Mid Cap has an ongoing charges figure of (OCF) of 1.67 per cent and requires a minimum investment of £1,000.
