Luthman says that the sector has suffered a similar image problem to the tobacco sector, where investors saw limited pricing power, limited growth prospects and significant litigation risk. Healthcare management teams are refocusing away from low growth, litigious markets to emerging markets, in much the same way as tobacco management teams did a decade ago.
Luthman adds that management teams are taking the risk out of their research and development spending, partnering with state-sponsored organisations to mitigate the risk of the more experimental end of drug development. He says: “This could be transformational in terms of the quality of these companies….any move in the share price has been driven by yield investors, but the re-emerging growth prospects have not been priced in by markets.”
The fund holds AstraZeneca, GlaxoSmithKline, Pfizer and Eli Lilly, among other healthcare names.
The fund also has a weighting in the ‘challenger’ banks. Luthman says that the UK Government will not allow the incumbent banks to expand lending, but schemes such as the Mortgage Guarantee Scheme will promote re-mortgaging: “This opens the doors to widespread poaching,” says Luthman. “This is at the lower risk end of the mortgage market and is part of a political move to encourage challenger banks.” He has holdings in Handelsbank and Moneysupermarket based on this theme.
He also believes Sainsbury’s could be a beneficiary. As consumers remortgage, they will have more disposable income and it is the Sainsbury’s rather than the Lidl shopper that is likely to benefit most.
The fund continues to hold positions in the asset management sector. Luthman believes that asset managers should be a beneficiary of the improving economic climate and corporate earnings recovery. He says this represents a ‘less risky way of allowing investors to access economic recovery.’
Luthman has moved away from some of the ‘quality growth’ areas, which he says have served the fund well, but where valuations now look stretched. He has moved away from holdings in Unilever and Kimberley Clark, for example: “The rapid rise in wages in China is beginning to slow…margins are getting squeezed. Valuations have moved to levels that are too optimistic and we decided it was time to exit.”
