I have spoken to a number of managers this year who are restructuring their fund towards an economic recovery in the UK, buying house builders and financials in the belief these sectors will pick up as the likes of you and I become more comfortable spending money.
However, as they are experts in their field and privy to much more information than us regular folk, it can mean that private investors are often late to the party and are buying into these themes when it is already too late.
FE Alpha Manager Stephen Bailey, who runs the Liontrust Macro UK Growth and Liontrust Macro Equity Income funds, says there is one theme he is playing in his portfolios that can deliver over the next 10 years – pharmaceuticals.
The longevity of this theme has been questioned by some commentators recently given that the sector has attracted a lot of attention recently.
As yields on cash deposits and bonds are so low, many investors have moved to more defensive dividend-paying equities for income in the belief these should perform well no matter how bad – or good – the economic backdrop is.
This has meant that household names such as GlaxoSmithKline and AstraZeneca have seen a lot of interest, which has caused the value of their shares to increase.
FE Analytics data shows that the FTSE World Health Care index has returned 66.11 per cent over three years, nearly double the returns of the wider FTSE World index over that time.
Performance of indices over 3yrs
Source: FE Analytics
Despite that performance, Bailey says investors should have no fears about buying into the pharmaceutical sector now.
"This is still a relevant theme, despite the fact that these stocks have re-rated as yield-hungry investors have had to look outside of the bond market. That has caused the pharmaceutical companies in the US, for instance, to re-rate and some are now trading on high multiples."
"However, there has been a sea-change in sector. A lot of these companies had basically turned into distribution companies, which hadn’t been the case in the past. They used to thrive on developing new drug lines and innovation," he added.
The FE Alpha Manager says that there are a number of companies that have been making this transition to become more efficient, which in turn should make them more profitable over the longer term.
"Bristol-Myers have had a lot of success because of the shift, whether it has been by joint ventures or through their own pipelines. Either way, it is now considered a growth stock and is now on 23 times earnings."
"Pfizer are the same. They have spun off their animal care products and infants' nutrition assets to strip down the company. More recently our own GlaxoSmithKline has been selling off a lot of its non-core assets."
"They sold off Ribena and Lucozade for instance. This is a shift to make the company a more innovative and more nimble business," he added.
Bailey says pharmaceuticals bear many similarities to the state of the tobacco industry a decade ago. However, he says this change to company business models should mean that healthcare stocks surprise on the upside.
"In certain ways, people view pharmaceutical stocks in the same way as they viewed tobacco companies 10 years ago," he explained.
"They were seen as cash cows that gave a high yield and were generally sold at a discount to the market. People felt that there was nothing more to look forward to with tobacco, so it is a very similar description to pharmas now."
"However, that changed and it was great news for investors," he added.
FE Analytics shows that the tobacco sector has surged over that time. Over 10 years, the FTSE 350 Tobacco index has returned a staggering 474.5 per cent while the general FTSE 350 index has returned 137.05 per cent.
Performance of indices over 10yrs
Source: FE Analytics
As Bailey’s co-manager and FE Alpha Manager Jan Luthman told FE Trustnet earlier this year, one of the reasons why the sector re-rated so significantly was because it witnessed growth in its emerging market assets.
The manager says this should be the same with the pharmaceutical sector. However, there are concerns that growth in the emerging markets may be slowing, which could have a negative impact on the ratings of healthcare stocks, as it has done with Unilever, for example.
Nevertheless – and I must point out that neither managers made this link – after 10 years of a boom in smoking in the emerging markets, it is not too hard to imagine that pharmaceutical stocks may do well in the following decade because of this trend.
So, how can an investor gain access to this trend?
One way would be to use Bailey and Luthman’s portfolio, as the pair hold GlaxoSmithKline, AstraZeneca, Bristol-Myers Squibb and Pfizer within their £68m Liontrust UK Growth fund.
The fund is a top-quartile performer in the highly competitive IMA UK All Companies sector over 10 years, with returns of 164.97 per cent. As a point of comparison, the fund has beaten the FTSE All Share by more than 30 percentage points over this time.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Liontrust UK Growth requires a minimum investment £1,000 and has an ongoing charges figure (OCF) of 1.57 per cent.
Other funds that have high exposure to the sector include the five crown-rated Invesco Perpetual Income and High Income funds. FE Alpha Manager Neil Woodford is a big fan of a number of pharmaceuticals.
For exposure that is even more direct, investors could use the L&G Global Health & Pharmaceutical Index tracker fund.
Alternatively they could gain actively managed access to the sector via the likes of the open-ended Polar Capital Healthcare Opportunities fund or the closed-ended Worldwide Healthcare Trust.
