Investing in alternative sectors – 3 healthcare investment ideas

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.

• AXA Framlington Health

  Linden Thomson has been in the industry for almost two decades and is co-manager of the AXA Framlington Health fund. She’s joined by Peter Hughes who was named co-manager on the fund in June 2021. He joined AXA Framlington in 2015 and specialises in biotechnology and global equities.

  The managers invest in a range of healthcare companies around the world, including those involved in pharmaceuticals and biotechnology. The fund mainly invests in larger healthcare companies, but invests in some higher-risk smaller companies too.

  Roughly 75% of the fund is invested in the US, with the rest spread across parts of Europe, Asia and some higher-risk emerging markets. The managers currently invest in around 53 stocks. This is a relatively concentrated number and can increase risk, as each stock can have a bigger impact on performance.

  The fund has held up well over the long term, but more recent performance has been mixed. Since Hughes became co-manager alongside Thomson, the fund has returned 8.87%*. While this a positive return, it lagged the FTSE World Health Care index’s return of 13.17%. Though this is a short period to judge performance over and isn’t an indication of how it will perform in the future.

  	Jul 17- 18	Jul 18- 19	Jul 19- 20	Jul 20- 21	Jul 21- 22
  AXA Framlington Health	7.44%	9.69%	12.04%	13.55%	8.14%
  FTSE World/Health Care	13.67%	10.13%	12.08%	14.91%	10.00%

  Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2022.

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  AXA Framlington Health KEY INVESTOR INFORMATION

  
  
• Artemis US Smaller Companies

  Cormac Weldon leads the US equity team and has been manager of the Artemis US Smaller Companies fund since it launched in October 2014. He aims to deliver long-term growth by investing in smaller companies based in the US. Though these businesses are often among the most innovative and offer lots of growth potential, they're higher risk than their larger counterparts.

  The fund invests in a range of sectors globally, like industrials and financials. Around 19% of the fund is also invested in healthcare companies, including biopharmaceutical solution provider Syenos Health and dental equipment supplier Envista Holdings Corporation. He’ll typically invest in 40-60 holdings, which is relatively concentrated and can increase risk, as each stock has a larger impact on performance.

  Since Weldon became lead manager of the fund in October 2014, the fund has performed well, returning 202.57%* versus the Russell 2000’s gain of 138.04%. More recently though, the fund’s tilt towards companies in more economically sensitive sectors has hurt performance.

  We think a well-diversified and robust portfolio should include a variety of styles, as well as different types of investments and geographies. This fund features on our Wealth Shortlist of funds, funds selected by our analysts for their long-term performance potential – read our latest update.

  	Jul 17- 18	Jul 18- 19	Jul 19- 20	Jul 20- 21	Jul 21- 22
  Artemis US Smaller Companies	20.42%	20.39%	0.41%	35.57%	-12.87%
  Russell 2000	19.33%	2.40%	-10.99%	43.46%	-2/08%

  Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2022.

  FIND OUT MORE ABOUT Artemis US Smaller Companies INCLUDING CHARGES

  Artemis US Smaller Companies Key Investor Information

  
  
• Worldwide Healthcare Trust

  Worldwide Healthcare Trust invests in companies in the global healthcare sector, including pharmaceutical and biotechnology companies. They mainly invest in larger more established companies, but have the flexibility to invest in higher-risk small and medium-sized companies too.

  The trust is managed by a strong and experienced team. They favour financially strong companies that have underappreciated products in development or are run by a high-quality management team.

  The team invests heavily in the US, which makes up over two thirds of the trust. The rest is spread across the UK, other parts of Europe, Asia and some higher-risk emerging markets.

  A small part of the trust is invested in unquoted companies – companies that aren’t currently listed on the stock market. These companies are higher risk as they tend to be more difficult to buy and sell than listed shares. They also have the flexibility to invest in derivatives (ability to borrow to invest), which increases risk.

  The trust’s performance has been strong over the long term and it's done better than the global healthcare index since it launched in 1995. Remember though, investments can go down as well as up in value, so you could get back less than you invest.

  	Jul 17- 18	Jul 18- 19	Jul 19- 20	Jul 20- 21	Jul 21- 22
  Worldwide Healthcare Trust	11.54%	3.41%	20.13%	10.83%	-7.81%
  FTSE World/Health Care	13.67%	10.13%	12.08%	14.91%	10.00%
  AIC Investment Trust - Biotechnology & Healthcare	12.82%	4.06%	18.92%	7.00%	-5.63%

  Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2022.

  FIND OUT MORE ABOUT Worldwide Healthcare Trust INCLUDING CHARGES

  Worldwide Healthcare Trust KEY INFORMATION DOCUMENT