How to invest in global healthcare trends

With life expectancy rising and demand for medical treatments only set to increase, investing in healthcare could make sense.

The World Health Organization estimates that the number of people aged 60 or over will hit two billion by 2050, up from 900 million in 2015, so growth is likely to continue for some time. 

Growth in the number of older people living in the UK and many other countries around the world will fuel demand for medical products and services such as drugs, therapies and hip and knee replacements.

Furthermore, our understanding of diseases is improving all the time, while bespoke drugs and better data analysis could allow many formerly intractable health problems to be treated.

Vinay Thapar, manager of the AllianceBernstein International Health Care fund, believes that we will soon be able to use blood tests to predict peoples' cancer risk, which will save lives and make our health system significantly more efficient.

He says:

"Such developments will be game changers, given how costly cancer is and how late diagnosis is today."

He adds: "We are seeing encouraging technological developments and increasingly precise DNA sequencing."

Patrick Connolly, a chartered financial planner at Chase de Vere, argues that such trends reinforce the case for holding healthcare and pharmaceuticals stocks in uncertain economic times.

He says: "It seems there will always be strong demand for these products, regardless of the economy." 

He adds:

"Moreover, some stocks pay consistent dividends, so they should perform comparatively well if there are to be challenging times ahead."

Of course, healthcare is a very broad sector that includes everything from pharmaceutical companies to equipment and service providers. Some of these firms are well-known global giants, whereas others will only be familiar to a few people.

It's also a fast-moving sector in which innovation plays a key role in determining which firms are successful. As a result, warns Mr Connolly, it can also be highly volatile and must be approached with caution.

He explains: "The positions of market leaders are always under threat and they need to continually invest in research and development or in improving their services. It is incredibly difficult to determine which companies will be the winners of tomorrow and which the losers.

His point is echoed by an analyst, who highlights sector downsides such as the length of time it takes to gain regulatory approval for drugs and the tightening of government spending budgets.

He says: "Drug research is expensive, and you only find out at the end [of a drug trial] whether a drug works, so the disappointment can be great. What’s more, western governments can’t afford to support rising healthcare costs, so while demand might be high, prices may have to fall."

In addition, headds that healthcare is a great example of a sector where the risks involved in putting all your investment money into one area are high. That's why he suggests investors only have moderate exposure to the sector in their portfolios. "The potential has been around for a long time, but the major pharmaceutical companies have struggled with tight regulation and patent cliffs [where patents expire]," he says. "Dividends have been attractive, but capital growth has been elusive."

Turning to the merits of individual companies, one investment research analyst, highlights AstraZeneca (LSE:AZN) and Hikma Pharmaceuticals (LSE:HIK) as interesting stocks.

"AstraZeneca's latest first-quarter update reported good growth in sales of new drugs and in emerging markets," he says.

"Management has guided 2019 sales growth into the high single digits, which is the highest level for some years."

Hikma Pharmaceuticals, he suggests, is a higher-risk option. He says: "The share price has recovered over the past year, helped by a new CEO who is looking to reshape the group by cutting costs, improving margins and building on the product pipeline."

However, Martin Bamford, financial adviser and managing director at Informed Choice, advises caution – not least because any breakthroughs in DNA-based healthcare solutions could cause traditional pharmaceutical firms to quickly lose their value.

He says: "I suggest people don’t focus too much on a particular stock or niche area in the sector, as this can lead them into taking too much risk." Investing via a well-diversified fund and taking advantage of the expertise of a fund manager who can select suitable stocks is a must."

Naturally, the amount an investor should put into healthcare stocks and funds will depend on their precise circumstances.

Mr Bamford says: "A typical investor is likely to have some existing exposure to healthcare through global equity holdings, and it's important not to allocate more than, say, 3-5% of a portfolio specifically to the sector, in order to avoid duplication and overexposure.

Fund to watch: AXA Framlington Health

The aim of  AXA Framlington Health, which invests in the shares of listed healthcare companies, is to provide long-term capital growth.

Patrick Connolly, a chartered financial planner at Chase de Vere, suggests it as an option for those seeking specific exposure to the healthcare sector.

He says:

"The fund invests in a diverse range of companies that aim to capitalise on developments and trends relating to health."

These include pharmaceutical producers, biotechnology firms, medical device and instrument manufacturers and product distributors.

The fund may also invest in care providers and managers, as well as other healthcare service companies.

Pharmaceuticals is the largest sub-sector allocation in the fund (37%) followed by healthcare equipment (23%) and biotechnology (10%), according to the fund's recent fact sheet.

The 10 largest holdings, which collectively make up about 40% of assets under management, include Merck & Co (NYSE:MRK), Medtronic (NYSE:MDT), Thermo Fisher Scientific (NYSE:TMO) and GlaxoSmithKline (LSE:GSK).

The fund’s manager, Dani Saurymper, warns that, looking ahead, the US presidential election in 2020 could raise short-term volatility across various healthcare sub-sectors. He also cautions that the biotech and pharmaceutical sectors are likely to see volatility in coming months as a result of drug pricing proposals due to be unveiled.

He says:

"Volatility is likely to continue as the election approaches, but we would regard that as an opportunity to add selectively where valuations diverge from intrinsic value."

Value of £100 invested in the fund over five years

* The £100 was invested on 1 January 2014. Source: Moneywise.co.uk

Rob Griffin writes for the Independent, Sunday Telegraph and Daily Express.

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