Artificial intelligence has singlehandedly raised US indices in a period of economic uncertainty, but it is its application in the underperforming healthcare sector that stands to make the biggest difference, according to Paul Major, manager of Bellevue Healthcare Trust (BBH ).

Speaking at a roundtable, Major pointed to the handful of US stocks that have driven the rally, including chipmaker Nvidia, Meta, Google-parent Alphabet and Microsoft.As a result, the MSCI World index has climbed 8.8% in the year to 31 May, but to the detriment of healthcare, which has seen outflows and underperformed despite being a classically defensive sector. The MSCI World Health Care index shed 2.1% in the first five months of the year.

‘Everyone’s talking about Nvidia, Meta and so on, but is AI actually going to make a profound difference to how people use Instagram and WhatsApp? AI could make a profound difference to paper pushing in healthcare,’ said Major (pictured).

He gave the examples of doctors getting instant responses to protocol questions, the end of processing and billing mistakes, as well as a huge reduction in fraud because AI can analyse behaviour patterns.

Major added that while hundreds of thousands of people would lose their jobs, the money saved would translate into lower insurance premiums for the consumer and hospitals would have much lower capital expenditure leaving extra capital for invested in and maintaining infrastructure.

‘The most boring part of healthcare, the bit nobody sees, the iceberg under the water, that’s the sexy and exciting bit in terms of saving money and improving care for us. I would much rather invest in companies that could benefit in that way than I would say Meta,’ he said.

Apart from strong returns from larger pharmaceutical companies, including Novo Nordisk and Eli Lilly, which are both focused on o%besity drugs, performance has been poor in the sector, particularly among BBH’s small and medium company hunting ground.

This has led to an ‘interesting divergence’ in valuation performance between small and medium-sized healthcare companies ‘and the rest’, with the period of divergence ‘almost unprecedented in recent history’, Major said.

This represents a good opportunity for investors because aside from the dotcom crash in the early noughties and the global financial crisis of 2008, small and mid-cap healthcare ‘always delivers higher returns than aggregated large-cap healthcare’, he said. ‘The reason for that is innovative and disruptive technologies that grow faster and deliver bigger returns.’

Valuations are supportive because it is not a thematic bubble driven by recent news, such as AI has been in the technology sector, Major said, noting that healthcare companies are quality growth stocks with growth behind them because there is demand.

‘There has never been a better time to be brave and allocate to small and medium-sized healthcare companies versus any other class of equities,’ he said.

The £847m portfolio of listed companies is heavily bent towards the US, to which it has a 96.5% weighting, with China-listed companies constituting 2.5% of total assets.

Exact Sciences, a diagnostics company and market leader in colorectal cancer screening, is the largest single holding commanding 6.9% of assts. Option Care Health, a 6.1% weighting, provides infusion therapy services, meaning patients can receive intravenous drugs at home rather than in a hospital, and Axonics, 5.7%, provides a discreet technology to aid incontinence.

Shares in BBH have slipped 1.1% in the year to date, far less than an average 12.7% decline in the life sciences sector. The trust’s net asset value has fallen 1.5% to put the shares on an 8.7% discount.