Everyone in the world is affected in some way by the healthcare sector – and that fact makes it very attractive to potential investors. Trillions of dollars are spent every year on everything from treating patients to researching innovative ways to cure diseases. And the most successful companies involved in these areas have the potential to deliver bumper returns to investors backing their ventures.
So, what do you need to know about putting your money into this area and what are the principle ways of getting exposure?
Our guide to healthcare explains how the sector works, highlights key trends, assesses the pros and cons, and suggests investment funds worth considering.
What is healthcare?
Let’s start off with a simple definition. Healthcare is an umbrella term that incorporates a wide variety of medical-related businesses. These include pharmaceutical giants, biotechnology firms, healthcare providers, medical device manufacturers, and even insurance companies. While some will be multinational household names, such as GlaxoSmithKline, others carry out their work off most investors’ radars.
Why is the sector attractive?
Technological advancements, demographic shifts and evolving patient needs are driving changes in the global healthcare sector. According to Deloitte, the professional services group, “the future of global healthcare is likely to be shaped by innovation, sustainability, social care integration, cost management, and workforce adaptation.”
On average, countries spend around 9% of their GDP on healthcare, while the US pays out 16.6%*. Healthcare expenditure in the UK was around £292 billion in 2023 – or roughly 11% of GDP**.
Four trends influencing the healthcare sector
- Ageing populations
People generally need more medical care as they get older and the World Health Organization predicts the world’s population of people aged 60 and older will double to 2.1 billion by 2050***. This means a greater number of people requiring treatments and the likelihood that both governments and individuals will be paying out more for healthcare services.
- Obesity treatments
As far as particular treatments are concerned, there’s been a recent boom in popularity for GLP-1 drugs that were originally developed for treating diabetes. However, they’ve also been found to be very effective in suppressing appetite and reducing calorie intake. Goldman Sachs has predicted the international market for anti-obesity medications could grow from $6 billion to $100 billion by 2030****.
- Robotics
Technological advances in minimally invasive procedures present attractive investment opportunities, according to an analysis by BlackRock: “Within this theme we see surgical robotics as a key beneficiary. Despite significant advancements in the past decade, hospital and procedural volume penetration remain low.”
- Artificial intelligence
Is there an area of the world that AI won’t infiltrate? AI increases the ability for healthcare professionals to better understand the day-to-day patterns of individuals. In fact, AI is already being used to detect diseases, such as cancer, more accurately and in their early stages.
Pros and cons of investing in healthcare
Benefits
- Ageing populations needing more care
- Remarkable developments in finding cures and treatments
- Many healthcare companies are very profitable
- Chance to invest in businesses that are making a difference
Negatives
- Difficulty predicting future trends
- Stock market unpredictability
- Unproven technology and research may fail
- Risk of the potential upside already being priced into share prices
How to invest in healthcare?
You can buy shares in healthcare companies through a stockbroker. This will give you pure exposure to movements in the share price. In basic terms, if shares in the company rise 10%, then the value of your overall holding in the business will have increased by the same amount. However, prices can also fall. Valuations can fluctuate enormously and even professional investors with analytical teams can get it wrong.
A less risky option than buying shares – especially for less experienced investors – is putting your money into an investment fund whose manager makes portfolio selection calls.
This route also provides diversification as funds can often hold more than 30 stocks. This means returns are less dependent on a handful of names. You can buy healthcare funds or opt for a more generalist portfolio that holds such companies alongside stocks from other areas.
Where should you start?
Here we consider five funds that could be worth considering from specialist investment trusts to wider equities portfolios and multi-asset funds.
Polar Capital Global Healthcare Trust
This specialist trust invests in healthcare stocks from around the globe. These companies will predominantly come from four sub-sectors: pharmaceuticals, biotechnology, medical technology and healthcare services. The portfolio is split into two segments: growth and innovation with a circa 90/10 split. The growth element is made up of predominantly larger companies, whereas the innovation pot will invest into medium and smaller companies that have the potential for greater growth in the long run. These innovation companies are typically disrupters of conventional medical practices, aiming to deliver the holy grail of better healthcare for less money.
Baillie Gifford Global Discovery
Healthcare has the largest sector weighting of 42.3% in the Baillie Gifford Global Discovery fund^. Its focus on growth and smaller companies separates this fund from many of its rivals. While not for the fainthearted, its investors have been richly rewarded over the medium and longer term. Currently, the largest individual company exposure is in Alnylam Pharmaceuticals, which accounts for 5.8% of assets under management^. However, it also holds STARR Surgical, which makes implantable lenses for the eye, and Exact Sciences, a molecular diagnostics company^.
GQG Partners US Equity
This fund, which seeks long-term capital appreciation for its investors, has significant holdings in pharmaceutical giants Eli Lilly and Novo Nordisk^. The strategy adopted for this portfolio is for it to be unconstrained and concentrated. We believe the fund has provided stellar returns since launch and expect it to continue thanks to its familiarity with thousands of companies and ability to be nimble. Healthcare accounts for 18.2% of the portfolio and the second largest sector weighting behind technology^.
Liontrust Sustainable Future Managed
The managers use a thematic approach to identify the key structural growth trends that will shape the global economy of the future, across a 40-60 stock portfolio. The three underlying megatrends are: better resource efficiency (cleaner), improved health (healthier), and greater safety and resilience (safer). As a result the fund currently has 14.9% invested in healthcare^. The fund aims to deliver capital growth over the long term (five years or more) through its own sustainable process and by investing in a combination of global equities, bonds and cash.
Janus Henderson UK Responsible Income
AstraZeneca and GlaxoSmithKline are among the largest holdings in this fund^, which aims to provide an income – along with the potential for capital growth – over the long term. This is a UK equity income portfolio that also avoids companies considered to be involved in business activities that are environmentally or socially harmful. As far as positive factors are concerned, it focuses on companies with good cash flows and growing dividends. It also prefers mid cap names. We like this fund’s well-defined approach to investing responsibly and believe it could be an attractive option for investors wanting a sustainable yield.
*Source: OECD, Healthcare at a glance 2023
**Source: Office of National Statistics, Healthcare expenditure, 31 May 2024\
***Source: World Health Organisation, 1 October 2022
****Source: Goldman Sachs, 30 October 2023
^Source: fund factsheet, 30 April 2024
