Recent conversations with allocators have occasionally centred around another terrifying buzzword invented by folk in finance – megatrends.
These are rather like regular trends, only...bigger.
One trend which several DFMs have told us they are keen on recently has been healthcare and biotech. And the astonishing rise of Novo Nordisk in recent months has perhaps shown there is proof in that pudding.
But Quilter Cirilium has cut its position in the healthcare sector because of depressed earnings.
“The healthcare sector saw its earnings surge during the pandemic, but these have since come back down and may now have over-corrected,” said CJ Cowan, portfolio manager at Quilter.
He said: "In light of the negative price momentum and lacklustre earnings, coupled with the uncertainties of an election year during which healthcare can often become a political football, we are reducing our position size."
This equates to a cut from 3 per cent to 1.5 per cent across the Cirilium range as the sector’s typically defensive characteristics have been out of favour in a particularly growth-y market.
Cowan added that the team sees scope for the sector to eventually be re-rated, but that timing a turnaround is always challenging.
Why the slump?
Ben Kumar, head of equity strategy at 7IM, told us there’s no doubt the Covid-19 pandemic distorted earnings in the sector.
During the reopening of the country, consumer staples didn’t bounce back as much as the wider economy because they didn’t fall so drastically in the first place, he said.
Then, in 2021, those “sweet, sweet” vaccine profits started to roll in, boosting 2021 earnings by more than 20 per cent – almost unheard of in healthcare, according to Kumar.
“Even in 2022, there were enough residual vaccines – my mum has had nine boosters so she tells me – to keep profits growing,” he said. “It was only in 2023 when that momentum ran out.”
Despite such a turbulent past for a supposedly dull asset class, defensive stocks remain a part of 7IM’s long-term thinking.
“As long as the growing global population continues to value good health, the sector is extremely attractive in the long-run,” he said. “At the moment, it’s also quite attractive in the short-term; especially compared to expensive IT and communications sectors on a valuation basis.”
(Investment) trust the process
We also spoke to the team at Hawksmoor to see if they share the sentiment, given they hold positions in similar thematic funds, and they told us they stand by the raft of healthcare investment opportunities available across various products, despite the downturn.
"Post-Covid, the sector enjoyed a strong run and ended up in near bubble territory in 2021,” said Dan Cartridge, fund manager at Hawksmoor. “A lot of that froth has now come out of the sector, with unprofitable, speculative biotech stocks falling by the wayside and the sector trending sideways for much of the past three years, despite a positive drug approval environment.”
Hawksmoor favours Polar Capital Biotechnology, Impact Health Reit, and Biopharma Credit as their three preferred vehicles for exposure to this theme, and Cartridge is especially interested by the substantial discounts on offer at present.
