According to the Global Thematic Funds Landscape 2021 report, assets under management in thematic funds have tripled in just three years, so that they now hold 2.1% of all global equity assets.
According to Lipper, assets under management by funds investing in the healthcare sector have grown from €15.5bn to €35.5bn in just two years. «While the pandemic has likely increased this demand, we believe the trends underpinning the sector, particularly demographic ageing and innovation, will continue to support long-term growth,» says Erin Xie, fund manager at BGF World Healthscience. She also sees near-term opportunities in, for example, healthcare companies, which can benefit from the return to normality.
Patricia de Arriaga, deputy managing director of Pictet AM in Spain, points out that related industries account for 10-15% of global GDP in developed economies, and that this figure is set to rise in the coming decades. «It’s a theme driven by the confluence of strong megatrends that the pandemic has accelerated, especially the focus on healthcare, which is defensive in nature,» she explains. Tazio Storni, manager of the Pictet Health and Pictet Biotech funds, which are governed by Article 9 of the EU’s Sustainable Finance Disclosure Regulation (SFDR), says: «New vaccine manufacturers may gain, but not in the way people think. What really remains is the creation of technology platforms for validation, including collaboration between competitors, which has increased considerably.
Specialised funds
In the list of products available to retail investors, «we are seeing a growing number of specialist funds that offer investors limited exposure to a particular area of the healthcare market, such as biotech or digital health. At the other end of the spectrum are the new thematic funds,» says Gavin Marriott, head of global and international equity products at Schroders. In his view, this sometimes broadens the opportunity set beyond traditional healthcare stocks into adjacent areas such as software, hardware technology and food products.
Adeline Salat-Baroux, manager of the Edmond de Rothschild Healthcare Fund, notes that many investors have changed their approach to markets in recent years because «they want their investments to make sense». Thematic funds, particularly those focused on healthcare, are responding to these expectations. Salat-Baroux continues: «These services have been around for a long time, but are experiencing a strong resurgence due to high demand from clients, especially retailers, who are often well aware of investment policy and social impact.
Since Covid’s inception, 22 new wellness products have been launched, with a total value of assets under management of €2.4 billion. In addition to the latest launches, «we can also see that the trend in flows into healthcare products has increased significantly since the start of the pandemic and has remained above pre-crisis levels ever since,» says Álvaro Cabeza, head of UBS AM Iberia. For the fund manager, healthcare is a key sustainability initiative, which is why, for example, in October it changed the name of the UBS (Lux) Healthcare fund, launched in May 1998, to UBS (Lux) Sustainable Health Transformation Strategy.
As for DPAM Invest B Equities Newgems Sustainable, it does not focus on one theme and also invests in consumer and communications companies, «but technology and healthcare are the most important». The latter is actually quite broad: from companies developing natural vitamins, drugs (Polypeptide), diagnostic devices (Heska) or medical care (Amedisys),» the independent firm explains.
Regarding the performance of these companies, Andy Acker, fund manager at Janus Henderson Global Life Science and Biotechnology. In September, he analysed the weak performance of small and mid-sized biotech companies as the healthcare sector accumulates double-digit gains through 2021, but was optimistic about the recovery of the healthcare sector globally. «Like the broader stock market, medical device stocks experienced volatility in the third quarter. However, attractive valuations, continued innovation and increased M&A activity could help support the sector,» Acker believes.
PASSIVE MANAGEMENT: INDEX SELECTION
EU-regulated healthcare ETFs have seen net inflows of €1.125 billion so far in the year to 31 October, according to data from Global X . Morgane Delledonne, head of research at thethematic ETFs, notes that «index selection ultimately depends on investors’ objectives, whether they want to focus on a sub-theme (e.g. genomics or digital health) or gain relevance to broader themes (biotech or healthcare innovation).» In addition, index methodologies are important for niche exposure. «Mutual funds weighted by market capitalisation let the market determine the winners in that theme, while balanced-weighted funds buy the losers and sell the winners based on rebalancing,» he says.
The Invesco Nasdaq Biotech Ucits ETF allows exposure to a benchmark sector equity index, but filters out companies that must meet minimum market capitalisation and liquidity requirements, and also limits the maximum weighting to 8% to avoid overexposure to any one stock.
The iShares Healthcare Innovation Ucits ETF, meanwhile, offers exposure to the two biggest trends: technological advances and demographic changes.
SPANISH: DIVERSIFICATION AND GROWTH
«The healthcare sector is a medium- and long-term growth sector due to the ageing population, which means that potential demand is constantly increasing,» says Jordi Más, manager of the CaixaBank Multisalud fund. Which, he says, was also one of the funds «richest in assets»before the pandemic.
It is one of the «most unknown sectors in terms of sub-segments, and one of the positive aspects is the great diversification it offers us», notes Elena Rico, manager of Renta 4 Megatendencia Salud. The medical technology segment «is one of the most attractive in terms of revenue growth rates, margins, low debt levels and large investments in innovation».
The manager of Imantia Futuro Healthy believes that «for retail investors, any company that deals with improving the quality of life (medical advances, longer life span, better nutrition, sports) is interesting».
CHINA: THE MARKET WITH THE MOST POTENTIAL
Over the past five years, China’s healthcare sector has grown at an average of 15-20% per year, with healthcare spending growing faster than GDP. As a result, the Invesco China Healthcare Equity Fund invests in this market, which could grow over the long term thanks to rising demand for healthcare services that benefits from the country’s growing middle class and ageing population: by 2050, there will be more elderly people than children in the country.
The two main drivers of the sector, according to the executive, are the advances in the healthcare technology curve and China’s healthcare reform, «with extraordinary growth potential from the arrival of new medicines».
UBS AM has also launched a China Health Care fund this year, demonstrating its interest in the emerging markets sector.
INNOVATION: WHAT LIES AHEAD FOR COVID-19?
At Carmignac, innovation is found in several sectors and one of Mark Denham’s favourites, head of European equities, is healthcare, currently the largest sector in the Carmignac Patrimoine Europe portfolio.
Specifically, it represents 15-20% of the portfolio with exposure to three sectors: large pharmaceuticals, biotechnology and technology or medical devices. Indeed, its managers have always found opportunities in these areas, even before the emergence of the coronavirus.
They point out that «the fund has had very little exposure to Covid-19 because many of the stocks involved in vaccine research, such as Moderna, are in the US, while the fund focuses on Europe. Still, we have companies involved in the fight against Covid, such as AstraZeneca, but we have added the name for other reasons».