Despite coronavirus, David Prosser looks at the merits of the Biotechnology & Healthcare sector.
Investment companies do not operate in a vacuum and like the rest of the market, they’ve seen painful losses over the past week courtesy of mounting alarm about the Coronavirus. Share prices are down at the vast majority of closed-ended funds, even in the alternatives space, which has been so popular amongst investors and advisers seeking diversification.
The standard advice on such occasions applies here, of course. Equity investment is a long-term pursuit and selling up in a panic almost never makes sense. Regular savers, moreover, will be benefitting from the positive effect of pound-cost averaging, with their fixed monthly investments going further now that prices are lower.
However, I’m struck by another thought during this current crisis. The solution to the Corona virus will ultimately come from the healthcare industry – the biotechnology and pharmaceutical companies that are able to develop vaccines that stop the virus in its tracks. And, to put it bluntly, the companies that deliver those vaccines are going to make an awful lot of money.
Such discussions may feel unseemly at a time when we’re worrying about people’s health and wellbeing, but investment company investors know all about the potential of the health industry to deliver rewarding returns. Data published last month by the AIC revealed that the Biotechnology & Healthcare sector of the investment companies industry outperformed all others over the 10 years to the end of last year – and by a remarkable margin.
Indeed, the average fund of this type delivered a return of 491% over this period, against 379% from UK Smaller Companies funds, which finished in second place. To put the data in context, the average Biotechnology & Healthcare investment company delivered well over twice the return managed by the investment companies industry as a whole (198%).
Sometimes, investing in healthcare stocks can be a rollercoaster ride. Take the remarkable story of Novacyt, the Anglo-French biotechnology company that saw its share price rise by more than 1,000% during the first half of February, after it developed a test for the Corona virus. Its shares subsequently slipped back by almost half and then rebounded once more.
Still, the long-term potential of the sector is hard to over-estimate. Megatrends in its favour include demographic change, the increasing purchasing power of developing economies and the remarkable advances in medicinal and scientific research. Those businesses able to ride these themes will perform phenomenally well, even if there will be ups and downs in the short term amid the inevitable setbacks and delays that hit drug development.
Moreover, investment companies are uniquely well-placed to provide investors with exposure to this sector. The closed-ended structure is ideal for investing in what are often small and illiquid companies. It also protects investors during periods of market turmoil, leaving managers free to get on with the day job without worrying that hordes of investors are running for the exits.
Will healthcare top the performance charts over the next decade too? Well, just as it’s important to remember the basics of financial advice during a stock market correction – keep your eye on the long term – so we must remind ourselves that past performance is no guide to the future. Still, it would be a brave decision to bet against cutting-edge biotechnology and healthcare companies once again excelling in the years to come.