Healthcare funds not quite what the ESG doctor ordered

Technologies that disrupt the healthcare sector offer investors a tantalising way to tap into ageing demographics but funds in the space are not without risks and do not automatically score highly on ESG considerations either.

Robotics, genome sequencing, biological engineering, healthcare trackers and artificial intelligence are among the technologies making current activities obsolete and creating new health services, says Fouad Benseddik, director of methods and institutional relations at ESG research provider Vigeo Eiris.

T Rowe Price US Large Cap Growth Equity portfolio manager Taymour Tamaddon highlights opportunities in companies using robotic technology.

Stryker, is rapidly increasing market share, Tamaddon says, because of its combined 3D printing and robotic technology, with which it has specialised in hip and knee replacement surgery. It is a top-10 holding in the $2.2bn fund with a 2.49% weighting.

Additionally Intuitive Surgical, a US company in which T Rowe Price is the largest shareholder thanks to its 8.99% stake, is able to bring “vast improvements” in clinical outcomes and patient recovery times with its robotic products, he says.

These allow minimally invasive robot‑assisted surgery for operations including orthopaedic hip replacements, cardiothoracic surgery and neurosurgery.

A big advantage of such technologies is their ability to reduce healthcare costs by, for example, lowering recovery periods in hospitals, says GinsGlobal Index Funds managing director Anthony Ginsberg.

“Governments and industry are under pressure because of the rising costs, and the US healthcare premiums, essentially, have almost doubled in the US in the last decade,” Ginsberg says.

The £6bn healthcare fund universe

The number of funds tapping into these type of trends are increasing.

In September, Schroders unveiled the Global Transformation Range of funds which will seek out long-term opportunities. Alongside the Schroder ISF Healthcare Innovation fund, a Luxembourg-domiciled Sicav, themes will include urbanisation, climate change, disruption and energy transition.

There are 10 funds with collective assets under management of £5.6bn in the Investment Association universe with a health focus, according to FE Fundinfo. Wellington Global Health Care Equity, the largest at £1.8bn, has delivered the strongest performance over five years returning investors 84.7%.

IA funds with a healthcare focus

Source: FE Fundinfo

Healthcare innovation is also a theme in MSCI’s recently launched disruptive technologies index.

HANetf, a white label ETF provider, together with Gins Global Investment Management, developed the Han-Gins Indxx Healthcare Innovation Ucits ETF (WELL).

The ETF tracks the Indxx Advanced Life Sciences & Smart Healthcare Thematic Index, which measures the performance of listed companies involved in the advanced life sciences and smart healthcare sector.

The dollar-denominated fund, which was launched in April 2019, has 101 holdings.

The themes in the sub sectors are heavily weighted to medical devices, making up 45%, followed by biological engineering with 28%, neuroscience (11%), robotics (4%), genome sequencing (4%), healthcare trackers (2%) and others. Regionally, it has a focus on the US with 69%.

Potential for speculative bubbles in disruptive tech

But there is no certainty of disruptive technology funds outperforming their peers, Benseddik says.

“Uncertainty about potential applications, capital intensity and societal acceptability influence return on investment cycles. Here as elsewhere, it is necessary to be attentive to speculative bubbles,” he notes.

Daniel Koller, head of investment management at investment trust BB Biotech, offered by Swiss company Bellevue Asset Management, says: “Getting in early when an investment opportunity starts taking off with massive upside potential is every investor’s dream, but often that also exposes investors to unexpectedly high risk.

“In the health industry, gene therapies seem to be up and coming, but many of these approaches are in early clinical development and will take years to reach the market, if they even get that far.”

The Association of Investment Companies has an entire sector, Biotechnology and Healthcare, focused on this space with £4.6bn AUM across seven investment trusts.

Investment Trust Biotechnology and Healthcare sector constituents

Source: FE Fundinfo

ESG considerations

Although healthcare might appear to be a natural fit for responsible investors, it can also run counter to ESG considerations.

Benseddik says these technologies need to be considered in a wider context.

“The same technology can be used to empower people and make society better and more inclusive as well as alter the psychological integrity, independent judgment of individuals and threaten freedoms, privacy and job quality.

“It is therefore essential to think and manage investment in disruptive technologies in terms of both economic and financial terms, but also in terms of social and environmental risks.

“It is a multidimensional challenge that concerns respect for human rights, the development of human resources and skills, the responsible management of restructuring, business ethics and the control of the societal impacts of technological change,” Benseddik says.

Ginsberg says that the company asked index provider Indxx to limit any unethical companies in the holdings.

“If they are not basically meeting crucial standards, they should not be included,” he believes.

Vigeo Eiris, which is an independent provider of ESG research and investment services, recently developed a criterion, which rates companies on their commitment and ability to use artificial intelligence in a responsible manner.