2019 has not been an easy year for investors. Rarely can one recall a period where so many macro-political uncertainties have coalesced. The stockmarket seems to be flailing about like a wounded animal, veering from one factor driving performance to another (value, growth, momentum etc). At the time of writing, the FTSE 100 is up around 7% over the year-to-date. In dollar terms, it is up a little over 8% but, mirroring the pound, it fell in August into negative territory before rebounding again. Investors are variously told that the market is cheap or expensive, and that recession is both imminent and unlikely. Amidst so much apparent confusion, where can one find a stable outlook? Surely there must be somewhere that can offer growth, yield and a reasonable valuation?
Few things in life are certain, but some axioms hold fast: there are ever more people in our world, and they are, on average, getting older. The bulk of healthcare resources are consumed by the elderly, since the price we pay for a longer lifespan is an increased burden of chronic disease later in life. In developing markets, health spending rises faster than GDP as the emerging middle classes have the time and resources to focus on remaining healthy. The combination of all these factors is unremitting demand growth. Put simply, healthcare is the secular growth story of our age and one that is likely to accelerate as medical discoveries and new technologies open up ever more opportunities to ease the burden of human suffering.
There is, as ever, a catch. The healthcare systems of the developed world were not designed to cope with this elderly, morbid population and healthcare expenditure has been rising as a proportion of GDP, eating into our marginal wealth gains from productivity. This trend will worsen if the system is not reformed.
The trope that the NHS simply needs more money is mere political expediency; more cash will not magic up trained doctors and nurses, nor will it tame the beast of above-inflation medical cost trend. However, one need not surrender to this fate – myriad new technologies have credibly demonstrated that the healthcare treatment paradigm is ripe for change, offering both improved care and lower costs. It is not just society that will benefit; the investor can profit from this profound revolution as well.
Our fund, BB Healthcare Trust, was launched in late 2016 to profit from this necessary and inevitable healthcare revolution. We manage a concentrated portfolio of operationally geared exposures to key areas of profound change. These changes will likely happen first in the United States, but will be global. However, the spoils of victory will be accruing to a very different set of companies than those whose incremental innovations in drugs and medical devices have powered portfolios in recent decades, so our fund is unconstrained and can thus invest in relevant adjacent areas such as technology and consumer products. We are total return focused, but offer a divided out of capital as many of these companies will not pay dividends for decades, if at all. This also allows us to offer a competitive payout in a world where yields are hard to find (especially ethical or sustainable income – how much FTSE yield comes from extractives and tobacco?).
In addition to a raft of novel treatments and products, the companies and themes driving our fund include electronic triage (e.g. Teladoc), Robotic surgery (e.g. Intuitive Surgical), Genetic testing and molecular diagnostics (e.g. Illumina). Healthcare has been a contentious political football for many years, but the NHS knows what the future can offer and the politicians should leave well alone and allow healthcare ‘to heal thyself’.