Four investment funds in the health sector: an opportunity for patient investors

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Everybody needs medical attention at some point in your life. And where there is something that everyone needs, there is also a great opportunity for investors. More than 7.8 trillion dollars (approximately 6.6 trillion euros) are invested every year in healthcare around the world, half of that amount in the US.

Since the sector is growing considerably faster than the overall world economy, it is almost certain that these figures will be higher by the end of the decade, even more so considering the current pandemic. The health sector is so broad that the companies involved in its activity can be segmented into different types:

1) Pharmacist: It focuses on the development of drugs to treat diseases. As part of this group, biotechnology uses living organisms, such as bacteria or enzymes, to develop medications. The listed companies in this group can be large, with annual sales figures of billions of euros, or small biotech companies that have not yet started to market their products.

2) Medical device manufacturers: They are part of another group of companies that manufacture devices used to care for patients. These devices can be simple, like thermometers or disposable gloves, or they can be very complex, like artificial heart valves and surgical robots.

3) Companies that take care of healthcare costs: Primarily health insurers, which collect premiums from individuals and employers to pay for health care costs.

Comparative evolution of different health subsectors.

VDOS

4) Healthcare providers: They are on the front lines offering healthcare services to patients, including hospitals, doctor’s offices, home health companies and long-term care facilities.

The four groups of companies have great potential for future development, even without Covid-19. Longevity, increased demand for medical care in developed countries and, in general, greater concern for prevention and health care were already in wide demand before the arrival of the coronavirus in our lives.

Regulation and potential

But it is a highly regulated sector. We are now seeing how vaccines have to go through a long period of testing before being authorized for public use, which implies a strong investment in research, development and testing of a product that may or may not be approved for commercialization.

This is especially so in the case of biotechnology and pharmacy. Insurers and manufacturers of medical devices are more stable businesses. For this reason, it is important that a portfolio in the health sector is well diversified, including securities from the four groups to reduce its risk.

The weight of trials

An easy way to do this is through an investment fund. In the VDOS Health category there are two particularly interesting funds. One of them is AB Sicav I – International Health Care Portfolio that achieves a one-year return of 14% in its class A in dollars, with a fairly controlled volatility of 16%. Follow an investment style bottom-up pure, individual selection of companies. The management team believes that it is not possible to predict the results of scientific trials and develop an investment process that is repeatable over time, so they focus on the businesses of the companies in which they invest.

They use the Return on Invested Capital (ROIC) as an indicator, considering that it is a truer representative of the value that a company is creating for its shareholders. It includes stocks of Roche Holding (8,56%), UnitedHealth Group (8,41%), Vertex Pharmaceuticals (5,91%), Pfizer (5.81%) and Amgen (5.22%) among its highest positions. The minimum investment required to subscribe this fund is 2,000 dollars (approximately 1,697 euros), taxing its participants with a fixed commission of 1.8% and a deposit of 0.5%.

Denominated in euros, Bellevue Funds (Lux) – BB Adamant Medtech & Services it revalues ​​4.6% at one year in its class B in euros, registering a volatility of 19% in the same period. Select your assets from the entire universe of the health sector, but excluding drug manufacturers. It is a suitable alternative for investors who want to benefit from the excellent fundamentals that the healthcare market offers, but who do not want to have exposure to the most volatile subsector of drug manufacturers, which is very sensitive to patent and research and development related processes.

Actions of Abbott Laboratories (8,74%), Medtronic (6,32%), Danaher (6,07%), Becton Dickinson and Co (5.13%) and Boston Scientific (5%) represent the largest positions in the fund’s portfolio. It applies to its participants a fixed commission of 1.6% and a deposit of 0.4%.

Opportunities by valuation

In the biotechnology category, the highest rated fund (five stars from VDOS) and most profitable in the year is Polar Capital Biotechnology with a revaluation of 7.3% in its R distribution class in euros and 28.7% in the last year, a period in which it registered a volatility of 27.6%. Invest in companies that offer a Growth at Reasonable Prices (GARP) profile.

The management team seeks to identify catalysts that may come in the form of clinical data, regulatory decisions, intercompany alliances, or quarterly sales of traded assets. Its five largest positions correspond to shares of Regeneron (6,7%), GEN-X BV (5%), Vertex Pharmaceuticals (5%), Incyte Corp (4.50%) and Exelixis (4%). Its fixed commission is 1.5% and that of deposit is 0.02%, also applying a variable commission of 10% on positive results between the fund and its benchmark, the Nasdaq Biotechnology.

In the same category, class U of capitalization in euros of Janus Henderson Global Life Sciences obtains a return of 1.5% in the year and 16.7% in one year, with a controlled volatility of 20.4%, which places it in the best group in its category for this concept, in the fifth quintile. The management team starts from a global approach to identify companies of high quality, or with growth potential within the life sciences sector and trading at levels below the market, in accordance with their intrinsic value estimate.

They believe that the rapid growth of the healthcare industry around the world offers great opportunities for a team that, like Janus Henderson’s, sets itself apart by the depth of its analysis and its commitment to providing superior results over the long term. Among its largest positions we find shares of Merck & Co (3,73%), UnitedHealth Group (3,54%), Novartis (3,31%), Abbvie (3.22%) and Thermo Fischer Scientific (3.16%). A minimum contribution of 2,500 euros is necessary to subscribe the U class of capitalization in euros of this fund, whose participants bear a fixed commission of 0.8%.

Comparative evolution of investment funds in the health sector.

Comparative evolution of investment funds in the health sector.

VDOS

Despite the risks, the health sector seems to present excellent long-term expectations. The combination of longevity and technological advances should open a wide range of opportunities for companies in the sector – and provide healthy returns for patient investors.

*** Paula Mercado is Director of Analysis for VDOS.

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