Page 23 - DIY Investor Magazine | Issue 33
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  Healthcare spending is also relatively defensive. WHO reports that between 2000 and 2019, health spending per capita in the 29 high-income countries rose 57%, much faster than their 21% average GDP growth.
A sharp jump in health spending was observed during
the global financial crisis and its aftermath; in 13 of the 29 countries, annual growth in health spending was two to three times the growth in GDP.
In 4 countries, it was more than triple. This has resulted in a hefty tailwind for investors exposed to the Healthcare and Biotech indices over the last fifteen years (including the 2008 GFC), as shown.
Performance in 2021 and subsequently has been poor, leading managers and commentators discussing the valuation opportunity; biotech in particular, and growth stocks within healthcare, have been particularly badly hit by sentiment.
Year to date, the Nasdaq Biotechnology Index is -6.7%, compared to the MSCI ACWI return of -3.2% and the MSCI World Healthcare Index return of +1.3%.
Recent underperformance has led to significantly lower valuations for companies, particularly those strong growth prospects. Enthusiasm for current valuations is reflected by two specialist management teams in the healthcare sector who presented at our recent virtual conference (see here to download slides and audio).
Both are bottom-up stockpickers; both observe valuations are very attractive by historical standards, and have geared up as an illustration of their conviction.
The managers of BB Healthcare (BBH) are “unremittingly optimistic”. They see valuations of their portfolio companies as highly attractive, believing inflation, interest rates rising, or war in Ukraine won’t have any lasting impact on demand for healthcare.
They see healthcare systems around the world creaking and companies that can increase capacity at lower cost as long term winners. BBH typically invests in mid-caps, with higher growth and more nimble management. Since launch, average gearing has been 1.8%, but indicative of their view that “history will look back on this moment as a fantastic relative opportunity for long-term healthcare investors”, the team have increased this to around 9%, with further headroom.
Similarly, managers of International Biotechnology (IBT) have reacted to valuations falling by adding to gearing, saying: “We firmly believe the fundamentals of the sector remain intact... we are buckled in and ready for the ride”. IBT offers a diversified portfolio of biotech companies, with the team making a conscious effort to deliver returns with lower. IBT’s NAV has been less volatile over five years, but it has also outperformed its peers.
That gearing has increased markedly is indicative of the
high conviction of the managers in the long-term opportunity presented by their portfolio; if they are right, small and mid-cap exposure and level of gearing could set the trust up for a strong period of performance.
   Relative performance has also evolved; an upward sloping line denotes outperformance and downward underperformance.
Healthcare and biotech have broadly trended upward, although it stalled in early 2015 following Hilary Clinton’s tweet promising to “take on” price gouging in the speciality drug market.
Healthcare indices have been on a steadily upward trajectory over the last decade, with little further progress on the absolute level of outperformance since the onset of the COVID-19 pandemic.
DIY Investor Magazine · Apr 2022

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