Potential ways to play the global healthcare sector boom

Which broad-based funds offer the best exposure to health-related stocks worldwide?

Funds and Investment Trusts May 11, 2020 by Tom Bailey

When it comes to financial markets, the past decade belongs to the big US tech companies. Existing giants such as Amazon, Apple and Microsoft got bigger, while newer companies such aa Facebook surged to the top of market-cap weighted indices.

Many of those companies are still performing well, despite the pandemic and resulting economic chaos. However, as Darius McDermott managing director of FundCalibre, argues, the coronavirus pandemic could see healthcare stocks become the leaders of the next decade.

He asks: “With the spotlight now well and truly on the sector and governments around the world likely to increase spend considerably, will it be healthcare that comes out top by 2030?”

With this likelihood in mind, he suggests six funds that investors could use to play this theme.

First, he highlights AXA Framlington American Growth, which currently has a 22% allocation to healthcare companies in the US. These include United Health Group Inc and Dexcom, both in its top 10 holdings.

McDermott notes: “The manager of this fund believes companies need to be able to innovate and change behaviour to become market leaders.”

On the other side of the Atlantic, McDermott flags up Janus Henderson European Selected Opportunities. This has an allocation to healthcare similar to AXA Framlington American Growth, at 22.6%.

Of its 40-50 holdings, Roche, Novartis, Grifols and Novo Nordisk account for more than 13% of the total portfolio, and are all among the top 10.

There are also plenty of UK-based healthcare-focused funds, says McDermott, pointing to Marlborough Multi-Cap Growth, which has a 21.9% allocation.

He notes: “The UK is perhaps surprisingly full of wideranging healthcare-related opportunities, and this multi-cap fund takes full advantage of this.” The fund’s top holdings include Genus, the company that uses biotechnology to improve animal genetics, as well as AstraZeneca, Dechra Pharmaceuticals and Craneware.

The Morgan Stanley Global Brands fund also has a strong weighting to healthcare, with holdings such as Baxter International and Abbott laboratories in its top 10, accounting for 8.4% of the portfolio. The fund has held up well in the recent market turmoil and is already back in positive territory when measured year-to-date.

Finally, Asian markets also offer potential healthcare plays. McDermott flags up Stewart Investors Asia Pacific Leaders, which has a healthcare allocation of 16.6%.

He notes: “The MSCI AC Asia Pacific ex Japan index has just a 5.4% weighting in healthcare companies, which makes this fund’s 16.6% allocation to the sector a significant overweight.”

While these opportunities are all in the open-ended fund universe, the potential of healthcare-focused investment trusts during the coronavirus pandemic has caught the eye of a number of commentators lately.

Interactive investor’s columnist Ian Cowie recently outlined his approach to healthcare sector investing. He argues: “A growing, ageing and richer global population boosts demand for improved biotechnology and healthcare.”

Meanwhile, in the latest issue of Money Observer’s Trust supplement, David Prosser gave his take. He suggests that healthcare and biotechnology trusts have not been immune to the stock market ravages of the coronavirus pandemic, but have fared better than others. But beyond the crisis, the sector will be propelled forwards by strong tailwinds, he says.

A recent research note by broker Killik also identified an increase in healthcare spending as one of the key themes likely to shape our coronavirus world.

Part of this will be with the aim of increasing capacity, as countries around the world will conclude that having a healthcare system working at full capacity under normal conditions is no longer acceptable.

At the same time, Killik anticipated there will be an increased push towards next-generation healthcare technology, with increased use of online doctors and artificial intelligence.

Killik argued that the winners of this will be diagnostics companies, hospital equipment suppliers, next-generation digital healthcare providers and health insurers. It identified Danaher, the world’s leading supplier of diagnostics machines, and Philips, a provider of patient monitoring systems, as potential winners.

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