The healthcare sector has already been a popular investment choice on a global scale for some time, with some viewing ongoing structural changes as a precursor for short-term growth opportunities and long-term tailwinds.
However, according to Stephany, manager of the Newton UK Opportunities Fund, several factors are combining to make the UK industry a particularly viable option.
“The population is ageing, and as we go up the wealth curve people are spending more on healthcare,” he said, speaking at the Portfolio Adviser Expert Investor: UK Equity conference.
“People need to pay hospital charges, for flu tablets and operations – all the things that are taken for granted in western world – while the workforce that pays for all of it [through tax] is shrinking. There are two trends – population dynamics and healthy demand. The world is getting richer, and the corollary of that is that as people get richer they want the things that they take for granted.”
As well as increasing demand via favourable demographics, Stephany says that not only is the consumer side of equation primed for capitalisation but there is also a more accommodating corporate climate.
“One of the key reasons that the UK is the ideal place to invest in healthcare is tax,” he explained.
“Companies are drawn to doing their intellectual property developments in the UK because they benefit from tax rates of 10%, which is effectively a 10% tax cut.”
Finally, domination of the UK over-the-counter pharmaceuticals space by the established names means that profits are both attractive and durable, bolstered by growing demand in developing markets.
“For example, while being able to cure a headache with a pill is so simple, it is only starting to grow in the emerging world,” said Stephany.
“The brand names – such as Nurofen and Strepsils – are very strong and take a huge share of consumer spend despite having been on the market for decades, while Reckitt Benckiser’s 33% margin is evidence of the difficulty of breaking into this market.”
However, at first glance Stephany’s extolling of the virtues of the healthcare sector does not seem to translate into his portfolio, where he holds a 2.5% underweight.
“We are stock-specific,” he explained, before referring back to the big names taking the lion’s share of the market.
“We hold Reckitt Benckiser, which is just outside our top ten holdings. However, there is a little bit too much risk in GlaxoSmithKline, which is the elephant in the room for healthcare investors.
“The US respiratory business, which has delivered about a third of Glaxo’s profitability in the past five years, is under real competitive pressure. There has been heavy restructuring and slashing of costs to keep profits moving forward, but this year I don’t see that succeeding, hence the sector underweight.”
