As a result, the dollar tumbled, gold fell, emerging markets plummeted, the oil price dropped.
Pain in the neck
All this was the instant reaction to the Fed’s chairman, Ben Bernanke, expressing the view that he might ease QE later this year, and was the reaction by traders rather than investors.
Something we all understand – and something that Portfolio Adviser has written about plenty of times in the past – is that investors, especially professional investors, look far more long-term than a half-day-if-that’s market moves.
Reassuringly, I know of many portfolio managers who are looking hard at the longer-term themes driving their portfolio construction, with one beneficiary to this being an allocation to healthcare.
The most obvious and oft-cited reason is the global changes in demographics: in the US, it is somebody’s 50th birthday once every eight seconds, yet the focus of marketeers, television schedulers, high streets and even investors is on the young.
On the other side of the world, by 2015, Japan will have to pay taxes 175% higher than they are at the moment to maintain the current level of benefits for the next generation as the percentage of its population being over the age of 75 rockets.
As played out by Newton Investment Management -an investment house renowned for its thematic style – as emerging country diets become richer, conditions such as diabetes are likely to increase in prevalence, mirroring the developing world, and requiring treatment on a large scale in countries where healthcare infrastructure may be relatively basic.
A history of the future
At the moment, I am reading “Future Files: A brief history of the next 50 years” by Richard Watson (the source for these US and Japan comments) who includes ageing as one of the five most important trends of the next 50 years.
One of the consequences he sees of the demographic shifts is the already-record-levels of money being spent on pharmaceuticals increasing and this fact alone is often used as justification by portfolio managers to include healthcare on a list of themes to follow.
But biotechs and pharmas are going through a rocky time at the moment and do not the same defensive characteristics they once did, with performance volatility the norm. In May the sector lagged the wider markets for the first time in 2013, with large-cap biotechs and pharmas bearing the brunt.
Healthcare may be a long-term, non-cyclical trend yet investment propositions need to offer more, especially as investors look to stock-picking fund manages to genuinely add alpha. But this is precisely why healthcare investing is a long-term theme.
Technology, for example, has had a huge impact on other industries but, as Gareth Powell, lead manager of the Polar Capital Healthcare Opportunities Fund, says healthcare is “very backward” in this respect.
He says: “Healthcare is very inefficient in how it is delivered and we will see changes here. Spend on healthcare will be lower than it has been before and will moderate further so there will be a shift in allocation to the services sector, to medical technology and devices.”
In his fund, biotechnology and pharmaceutical companies are at their lowest historical weighting, preferring instead medical technology and devices.
Risk on
Given that investors are looking for stock-picking fund managers, an allocation to healthcare may not look the most appealing because a majority of the risk is stock-specific. Powell says 85% of his fund is driven by bottom-up selection.
So is now the right time to get for healthcare? Powell is unlikely to say “No” to the sector as a whole, though he does say he might be slightly early into the services side of things.
“We might be early in terms of opportunities [in services] though there will be an impact from technology and being able to take advantage of inefficiencies. In cricketing terms we have just started the first session on day one of a five-day test match.”
There are risks to this investment theme – budgetary constraints, changes in politics and the regulation of healthcare products and services, the length of the journey from research and development through to a marketable drug, and so on – but as investment themes go, the demand for healthcare has the huge advantage of being one of those things that regulators hate so much – a guarantee!
