Here Is One Of The Ways Investors Can Invest In The Healthcare Sector
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It is an exciting time for the healthcare sector. The industry is seeing a massive wave of investment, innovation and new entrants, which is unsurprising given the spotlight casted by the Covid-19 pandemic. This, coupled with the fact that the demand for healthcare services are almost guaranteed to rise over the medium to long term from structural growth trends, has made the sector one to watch for.
The case for investing in the healthcare sector
The healthcare sector remains at the forefront of the pandemic. A number of healthcare companies have developed innovative therapies and vaccines to combat the virus, saving the lives of millions around the world.
While Covid-19 may be dominating the headlines, investors would do well to be acquainted with the sector’s wider opportunities, seeing that it is made up of many moving parts.
According to the Global Industry Classification Standards (GICS), under the umbrella sector of healthcare, there are two main industry groups. These two industry groups can be further broken down into six industries, which consists of: Healthcare Equipment and Supplies, Healthcare Provider and Services, Healthcare Technology, Biotechnology, Life Science Tools & Services, and Pharmaceuticals (Figure 1).
Figure 1 : The healthcare sector as defined by GICS
Opportunities exist throughout these segments, as secular drivers; such as demographic changes arising from an ageing population and an increasing healthcare expenditure, would mean that the demand for healthcare services is expected to grow over the medium to long-term.
For instance, according to the World Health Organization, by 2030, 1 in 6 people in the world will be aged 60 years or over. The share of the elderly population will also increase from 1 billion in 2020 to 1.4 billion by 2030 and double to reach 2.1 billion by 2050.
This will have a powerful impact on healthcare spending, and the growth of the sector from an investment perspective. As a population ages, healthcare needs increase in tandem, naturally leading to an increase in global healthcare spending (Figure 2). In fact, global healthcare spending is expected to rise by 4.1% year-on-year (YoY) in 2022, and will see one of the fastest growth rates in a decade.
Figure 2 : Healthcare spending is expected to grow
Seeing the opportunities in the healthcare sector, in this article, we take a closer look at the Manulife Global Healthcare Fund.
What is Manulife Global Healthcare Fund
The Fund aims to provide capital appreciation by investing in one collective investment scheme, with investment focus in health care-related companies globally.
The Fund is a feeder fund which will invest at least 95% of the Fund’s net asset value (“NAV”) in share class I3 of Manulife Global Fund – Healthcare Fund (Target Fund), and the remaining NAV of the Fund will be in liquid assets.
Investment strategy and process of Manulife Global Healthcare Fund
The Target Fund will invest at least 80% of its net assets in equity and equity related securities of health sciences companies*. These companies will derive more than half of their revenues from health care-related business activities or commit more than half of their assets to these activities.
*Health sciences companies has the same meaning as companies in health care and related industries.
While the Target Fund will invest in accordance with its investment objective and strategy, subject to applicable laws and regulations, the Target Fund is not otherwise subject to any limitation on the portion of its net assets that may be invested in any one country and in issuers of any market capitalisation. Hence, the Target Fund may invest more than 30% of its net assets in issuers located in the United States. The Target Fund’s investments may be denominated in any currency.
The Investment Manager of the Target Fund studies economic trends to allocate assets among the following major categories:
• pharmaceuticals and biotechnology
• medical devices and analytical equipment
• healthcare services
Figure 3 : The flowchart of the fund
The Investment Manager of the Target Fund also uses fundamental financial analysis to identify individual companies of any size that appear most attractive in terms of earnings stability, growth potential and valuation.
The Target Fund uses the MSCI World/Healthcare NR USD Index as a benchmark for performance comparison purposes only and the Target Fund pursues an actively managed investment strategy and may deviate significantly from the benchmark from time to time. While this deviation may result in performance that is meaningfully different than that of the benchmark, the Target Fund’s investment strategy will tend to invest in a universe of securities that are similar to that of the constituents of the benchmark.
Why FSMOne recommends this fund
FSMOne believe that select companies within the healthcare sector offer the potential for strong long-term outperformance. We continue to deploy our bottom-up fundamental investment process informed by an assessment of emerging scientific and medical trends coupled with our intrinsic valuation analysis.
This process should continue to ensure that our allocation of capital to companies tackling important unmet medical needs drives portfolio construction with deference to appropriate valuation discipline.
The Target Fund showed a stellar performance since 2017 in terms of calendar year return with significant return in 2017, 2019, 2020 and 2021 while limited downside in 2018 and YTD as shown below:
| YTD | 3-month | 6-month | 1-year | 2-year^ | 3-year^ | 5-year^ | 10-year^ | SI^ | SI | |
|---|---|---|---|---|---|---|---|---|---|---|
| Manulife Global Healthcare Fund | -1.7% | 5.8% | 4.7% | 15.6% | 12.2% | 12.7% | 8.7% | 13.8% | 10.0% | 274.2% |
Fundamentals within specific pockets of both the healthcare equipment & supplies and life science tools & services industries remain attractive, although valuations have become stretched. Specifically, select established leaders in the Covid-19 diagnostics space offer a unique investment opportunity as we believe the durability of these businesses is currently being underappreciated by the market.
In addition, we expect certain companies to experience disproportionate disruptions as a result of the Covid-19 pandemic and have reduced our exposures accordingly. Within the healthcare providers & services industry, we see value in select supply chain companies, specifically pharmaceutical wholesalers.
The Target Fund has delivered a sustainable return with a 10% annualised return since inception (274.2% without annualised) and a decent yet stable return throughout the years.
Table 1. Source: Bloomberg Finance L.P., iFAST Compilation, Data as of 29 April 2022. ^Annualized
We expect these companies to see improving margins from accelerating drug inflation and continued recovery in prescription volumes. We have increased our positioning in select healthcare insurers commensurate with improved profit profiles associated with the Covid-19 induced reduction in office visits and surgeries in the Medicare population.
