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Investing in alternative sectors – 3 healthcare investment ideas

In the first of our three-part series on investing in alternative sectors, we take a closer look at healthcare, how it’s performed, the opportunities for investors and share 3 investment ideas.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

The last few years have been turbulent for the healthcare sector, with many services being pushed to their limits over the pandemic. The period has required unprecedented levels of government support for global economies and an impact on economies that’s rivalled that of World War II.

It’s as important as ever to diversify. When we think about how to do this, shares, bonds or cash are often the first things that spring to mind. There are other ways to diversify though – ‘alternative’ investments can be a good option.

It’s a broad category including everything from metals and timber to food and energy. Alternative investments can offer different ways to diversify your portfolio, but can be difficult to understand and value.

In this three-part series, we’ll dive into three types of alternatives – healthcare, infrastructure and agriculture. We’ll look at how they’ve performed and some of the potential opportunities they can offer investors.

These are highly specialist areas that come with more risk. We think they should be held with other types of investments as part of a diversified portfolio. This article isn’t personal advice. If you’re not sure an investment is right for you, ask for financial advice.

How’s healthcare performed?

Healthcare for the most part is a necessity, not an option. The sector tends to hold up well in periods of uncertainty – someone who falls ill will need treatment regardless of how well the economy’s doing.

Over the last ten years, the healthcare sector has returned an impressive 318.74% versus the global stock market’s return of 238.55%*. Remember, past performance isn’t a guide to the future.

Over the shorter term though, performance has been mixed. The sector was initially boosted by tailwinds in the early stages of the pandemic. But increasing cases and pressure mounting on healthcare services globally caused a drop in sector performance in the early part of 2021.

The sector then picked up pace throughout the rest of 2021 and ended the year at a record high, despite inflationary fears and supply chain disruptions. However, this success was short lived.

The sector sold off due to rising interest rates, which particularly impacted earlier stage biotechnology companies. The rotation from growth to value stocks and Putin’s invasion of Ukraine early this year has also put pressure on the sector.

Growth vs value investing – which is best?  

The sector has tended to hold up well in this type of environment and has bounced back more recently. Over the last 12 months, it returned 10.0%, versus the global stock market’s return of 3.55%. This isn’t guaranteed and doesn’t mean it will outperform in the future.

Although specialist sectors, like healthcare, can be a useful diversifier to a broader investment portfolio, they’re volatile, with investments rising and falling very quickly.

We think they should form a small part of a well-diversified portfolio and investors should prepare to invest over the long term and accept the ups and downs.

What are the opportunities?

The healthcare sector can be split into two main groups.

The first includes manufacturers of healthcare equipment and supplies, or those that provide healthcare services.

The second revolves around those that research, develop, market and produce pharmaceutical and biotechnology products.

We spent roughly $8.3 trillion on the industry in 2020, with an increase of 6% expected in 2021, taking the estimated spend to $8.8 trillion. While this is an area many feel more money should be spent on, some longstanding industry challenges, like changing government regulations and rising costs of healthcare globally, are putting pressure on government budgets.

One of the key themes in the sector that could help with this is innovation. Advancements in technology could eventually lead to more accessible and efficient healthcare worldwide.

We witnessed this as companies researched, developed, and produced vaccines in record time and helped other parts of the industry to function, despite lockdown restrictions. This technology can also apply to future drug or vaccine work too.

The pandemic accelerated the adoption of some digital health services. This included tele-medicine, which allowed people to apply for prescriptions, attend check-ups and receive diagnoses online. Diagnostic tool improvements mean hospitals can identify some illnesses earlier. This is not only good for patient care and recovery prospects, but also for hospitals in being able to reduce costly late-stage procedures and potential admissions.

What are some of the challenges?

There are still plenty of longstanding challenges ahead for the healthcare sector.

Innovation has the potential to reduce costs eventually, but it could make healthcare more expensive in the short term. Spending will also increase as the population gets older. A person over 80 is likely to be five to seven times more expensive to public healthcare than someone in their 30’s.

Rising interest rates have also suppressed gains for growth stocks, including those in the healthcare sector. It punishes stocks that are expected to grow a lot in the future, like emerging biotechnology companies. That’s because the present value of their future profits is worth less today.

The need for healthcare is growing and the pent-up demand in the form of waiting lists on the back of the pandemic could fuel demand for healthcare companies for years to come. We’ve already seen a number of companies list their shares on the stock market over the last few years and governments will continue to spend more on streamlining the industry.

Investment ideas for investing in healthcare

These areas could offer some exciting opportunities for investors. But it’s important not to get carried away just because there’s exciting technology and new drugs being discovered.

Healthcare companies can be at the mercy of changing government regulation. Large investments in technology or drug research could fall at the last hurdle.

One way to invest in healthcare is through a fund or investment trust. These can either be run by specialist managers or as part of a more diversified fund or investment trust which invests in healthcare companies.

Investing in funds and investment trusts isn't right for everyone. Investors should only invest if the investment’s objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks before they invest, and make sure any new investment forms part of a diversified portfolio. Investments will rise and fall in value, and in a specialist sector investors should expect a bumpier ride, you could get back less than you invest.

Here’s a closer look at three healthcare investment ideas.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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