For all the talk of how technology has driven markets over the past decade, it is healthcare that is the undisputable secular growth story of our age, according to BB Healthcare Trust manager Paul Major.
The well-trodden argument for investing in this sector centres around the growing and ageing world population, which will require ever more healthcare as it gets older. Meanwhile, there is also disproportionate growth in the amount of GDP spent on healthcare as a country moves from emerging to developed status.
Major said the combination of these tailwinds means the demand outlook for healthcare is “relentlessly positive as far into the future as anyone can count on”.
Projected demographic growth
Source: BB Healthcare
“And you can't really say that about many other sectors of the economy with such confidence,” he added.
Yet the manager said there are other powerful tailwinds investors can tap into in this sector, even though, at first glance, they more closely resemble headwinds.
“The challenge of the demographic trends that are highlighted as positives is that someone in the end has to pay for them,” he explained.
“If you go to any of the advanced economies around the world, and the UK is no exception, and you look at healthcare costs as a proportion of GDP and inflation, what you find is healthcare inflation exceeds GDP inflation pretty much every year and if we don't change, it's forecasted to do so moving forward.”
The manager said there are three options to deal with the problem of healthcare inflation. The first is to continue down the same route and watch on as healthcare expenditure eats all of society’s marginal wealth creation. The second option is the one taken by the UK, which involves restricting the growth in healthcare costs so that it only matches the inflation in GDP.
“What that means is you end up with a chronically under-resourced system,” he continued. “You've really seen it play out quite strongly here in the UK during the pandemic and indeed every winter, when you see the demand pressures that we face on the NHS.”
The third option is the one Major believes most governments will eventually turn to over the coming decades, in which they admit defeat in struggling to pay for a system that is not fit for purpose. But the manager said that while this sound depressing, the good news is that by using the latest technology and medical advances, healthcare systems can be reimagined and delivered in a way that is both better and cheaper.
He pointed to 21 products, technologies or services he invests in that have been shown to either improve the quality or lower the cost of care by, for example, dealing with missed and late appointments; reducing paperwork, which currently accounts for about 25 to 30 per cent of frontline care staff's workload; and curing diseases for good, rather than temporarily treating the symptoms, which is how most modern medicines still work.
Source: BB Healthcare
Another aspect of healthcare the manager has been focused on since the launch of the trust, and one he said has been a massive source of returns, is diagnostics.
“The thing about diagnostics is that they have value as preventative medicine,” he said.
“In the future, we can get blood testing that tells you your risk of cancer at that particular moment in time. Then, if you do have some signals of early-stage cancer, we can send you in for a full-body CT scan and find that tumour. Hopefully it's the size of the end of a ball-point pen so we can zap it with a radiation beam or cut it out overnight. Then you don't get the stage-three or stage-four cancer diagnoses, which unfortunately result in people receiving palliative care because the tumour has spread too much at that point.”
Major is also excited about technology, pointing out that healthcare is one area that will benefit in an obvious and enormous way from the Internet of Things.
“Now I can't speak for everyone, but I have zero interest in having a conversation with my fridge,” he said.
“I don't really know what my fridge is going to say to me or what to say to my fridge. But if you take this ability for things to talk to each other and you put it in a healthcare context, it gets incredibly exciting.
“For example, if you have all of the call buttons in the beds in your hospital wired up to some kind of centralised system and you can measure how long it is before the nurse turns up and switches the call button off, you can work out whether or not a particular ward is overstaffed or understaffed and you can move your staff around accordingly.
“If you start putting passive sensors in beds, you can see if patients are being turned correctly or wetting the bed. The more we do things passively, the more we prevent human beings wasting time.
“Those things sound small, but if you accumulate all those marginal gains, you can actually get some very big savings.”
Some investors may be wary of investing in the market now it is above its pre-pandemic peak, even though there is a much weaker outlook. However, Major pointed out that much of the increase in valuations over the past year has been driven by the tech sector and that, if you remove this from the MSCI World index, P/E ratios look far more reasonable.
Looking specifically at healthcare, the manager said that while it has significantly outperformed the market over the long term and continues to be driven by powerful tailwinds, it is still trading at a comparable level to where it has been over the last four or five years.
“As the market has become more expensive in terms of buying growth, that hasn't translated into healthcare,” he continued. “Healthcare is still reasonable value in absolute terms. And as a consequence of that, relative to the rest of the market, it is extremely cheap.
“Notwithstanding any potential excitement you might have about coming out of the pandemic and wanting to get yourself some cyclical exposure to that pent-up demand, you're actually paying a significantly lower value for growth in healthcare. And that growth is more dependable over the long term because it's demographically driven, it's not just bonus growth because of a potential recovery.”
Data from FE Analytics shows BB Healthcare Trust has made 106.74 per cent since launch in December 2016, compared with 80.90 per cent from the IT Biotechnology & Healthcare sector and 55.63 per cent from the MSCI World/Health Care index.
Performance of trust vs sector and index since launch
Source: FE Analytics
The trust is on a premium of 2.72 per cent compared with 0.7 and 1.02 per cent from its one- and three-year averages.
It has an ongoing charges figure of 1.19 per cent.