One of the virtues of the healthcare industry is its predictability. Selling essential, non-discretionary products such as syringes or saline drips means that healthcare companies are usually relatively immune to economic turbulence and can even do well during recessions. 
Yet the pandemic tested conventional wisdom, with the postponement of all but the most essential procedures. Few could have predicted non-discretionary product categories such as pacemakers would have proved vulnerable to declining sales.
So, having far outpaced the wider global index over the past decade, with returns of more than 328 per cent*, the MSCI World/Health Care index has struggled over the last 12 months, returning 17.4 per cent* vs 36.9 per cent*.
Since the ‘vaccine rally’ at the end of 2020, however, things have started to look up once again for the sector. Sub-sectors most impacted by Covid – like hospitals, care providers and dental care – are seeing a recovery in procedure/patient volume once again.
The foundations were there to begin with
The truth is the healthcare sector had a lot of tailwinds before this pandemic – suggesting it will see significant growth in the medium to long term. For example, we have ageing populations across the globe, as well as the rise of the middle-class in many emerging economies. All suggest greater demand for drug treatments and medical care over time.
It’s also important to recognise healthcare is more than just large pharmaceutical companies. It’s a broad church which includes the likes of biotech – which has taken on the mantle of developing drugs from the large pharma companies, who in turn will typically buy and patent those drugs. Other sectors include medical devices (the likes of implants), managed care, life science, hospital facilities and many more.
Take telemedicine for example - the pandemic has really put the technology front and centre, with clinics closing for certain services after governments’ globally issued stay-at-home orders to help prevent the spread of the virus. I read recently that this market was worth just shy of $50bn in 2019 – but is now set to grow to as much as $460bn by 2030**.
With this in mind, here a few managers tapping into the rapid healthcare drive:
A few who’ve gone big
A natural starting point is a specialist vehicle, like the Polar Capital Global Healthcare Trust, which focuses on companies in the pharmaceuticals, biotechnology, medical technology and healthcare services areas. The portfolio is split into two segments: growth and innovation with a circa 90/10 split.
European Opportunities Trust manager Alexander Darwall has almost a third (30 per cent***) of his trust invested in healthcare. He believes selectivity is vital in the sector, adding that in addition to the pandemic - the reason why certain parts of healthcare are performing well, is that diseases are more global and more complicated. In response, the pharmaceutical industry now has genomics, gene therapies and theranostics (a combination of diagnostics and therapy).
Darwall points to his investments in French diagnostics company BioMerieux (which has developed the ‘gold standard’ in Covid tests) and Novo Nordisk - a world leader in the production of insulin and GLP-1 drugs which are used to treat diabetes and, increasingly, co-morbidities, notably obesity – as examples of companies benefitting from this.
Another is the BMO Responsible Global Equity fund, managed by Jamie Jenkins and Nick Henderson, which has a 17.8 per cent exposure to healthcare stocks****.
Don’t rule out Asian growth
Given the rapid growth in population and middle-class, Asia is another area investors may want to consider for earlier stage healthcare opportunities. While the largest healthcare company in the US at the end of December 2020 had a market-cap of $400bn (Johnson & Johnson), the largest in Asia was under $100m (CLS Biotherapies)^. In addition, healthcare made up nearly 14 per cent of the S&P 500 Index at the end of 2020, compared to less than 5 per cent for the MSCI Asia ex-Japan Index^.
But the upsurge has begun. For example, the number of healthcare IPOs between 2016-2021 was 473, a 73 per cent increase on those between 2011 and 2015^. Funds worth looking at here include the Ninety One Asia Pacific Franchise and the Fidelity China Special Situations Trust which have an 11.2 per cent and 13.6 per cent allocation to the sector respectively***.
Income
Finally, a number of traditional UK equity income offerings also have allocations to the healthcare sector, such as the Threadneedle UK Equity Income fund (13.6 per cent)*** and the Schroder Income Growth Trust (11.6 per cent)***.
Darius McDermott is managing director of Chelsea Financial Services. Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views are his own and do not constitute financial advice.
*Source: FE fundinfo, total returns in sterling to 15 March 2021
**Source: Globalnewswire.com
***Source: fund factsheet, 31 January 2021
****Source: fund factsheet, 31 December 2021
^Source: Matthews Asia – Asia’s Health Care Sector Accelerates