How to invest in healthcare
Healthcare companies are among the most innovative businesses on the planet and have the potential to be lucrative investments. They operate in multi-billion dollar industries that should benefit from increased demand for products and services as people are living longer.
But how can you get exposure to these stocks? Is it best to choose a selection of individual companies or opt for an investment fund and enjoy greater diversification?
Here we highlight some of the leading healthcare names, outline the reasons they are interesting, and discuss the different ways of getting access.
Overview of the sector
Let’s start with an overview. Healthcare is an umbrella term covering everything from fast-growing biotech firms to medical equipment manufacturers and pharmaceutical giants. While there’s always been a focus on such businesses, interest in this area has increased rapidly in the wake of the Covid-19 pandemic that swept the globe.
Overall spend in this sector is believed to have hit $12trn in 2022 – up from $8.5trn in 2018, according to the World Economic Forum’s Global Health and Healthcare Strategic Outlook. “Healthcare investments reached record highs in total funding in 2021 with a surge in venture investment and fundraising,” it stated.
Longer-term opportunities
There has been an unprecedented improvement in human well-being and longevity since the late 1940s, according to the World Health Organization. “Average global life expectancy at birth has increased from 47 years in 1950–1955 to 72 years in 2015–2020, an increase of 25 years or 54% over this time period,” it noted.
Such long-term demographic trends and fundamentals mean healthcare has enormous possibilities, according to BlackRock’s Active Equity Group. “It is defensive thanks to its low correlation with global macro conditions,” it said. “Compared to other sectors, demand for healthcare is resilient and less impacted by economic swings.”
Interesting companies
The good news is there’s no shortage of exciting companies in the healthcare sector. In fact, many have become household names for the work they carry out across the globe.
Here we highlight three leading names in different healthcare sub-sectors, as well as the investment funds that have already bought into their stories.
UnitedHealth Group
This is US-based business is the world’s largest healthcare company by virtue of its $460bn market capitalisation*. The company, which is traded on the New York Stock Exchange, provides healthcare products and insurance services through its two businesses: UnitedHealthcare and Optum. UnitedHealth Group’s 2022 revenues grew $36.6bn – or 13% – year-over-year to $324.2bn, while 2023 revenues are expected to be between $357bn and $360bn**.
The stock is one of the largest holdings in the T.Rowe Price Global Focused Growth Equity fund***, which has been managed by David Eiswert since 2012 and is on the Chelsea Core Selection. His fund invests in a diversified selection of global companies with the potential for above average and sustainable rates of earnings growth.
Novo Nordisk
The Danish pharmaceutical company, which has been in business for 100 years, specialises in treatments for diabetes, obesity, and rare blood and endocrine diseases. Sales and operating profit growth are expected to be between 13% and 19% at constant exchange rates (CER) in 2023, according to its most recent company results. In a statement, Lars Fruergaard Jørgensen, president and chief executive, pledged to continue “expanding and progressing” the company’s pipeline****.
Novo Nordisk is one of the 10 largest stocks in the Invesco Global Focus fund***, which aims to achieve capital growth over the long-term, defined as being at least five years. Healthcare currently has the largest sector weighting in this portfolio***. The managers favour winning companies with competitive advantages and attractive valuations.
Novo Nordisk is also the second biggest holding in the BlackRock European Dynamic fund*** – another Chelsea Core Selection fund. Lead manager Giles Rothbarth looks for undervalued companies and those with good growth potential.
AstraZeneca
The Anglo-Swedish pharmaceutical company, which is based in England and listed on the FTSE 100, is another giant of the healthcare sector. It recently announced total revenue increased 25% to $44.35bn in 2022, while chief executive Pascal Soriot highlighted plans for at least 15 new medicines before the decade’s end*****. “In 2023, we expect to see another year of double-digit revenue growth at CER, excluding our COVID-19 medicines,” he said.
AstraZeneca is a prominent holding in a number of portfolios, including the Rathbone Income fund*** and the Janus Henderson UK Responsible Income fund***.
Rathbone Income is a multi-cap UK equity income portfolio that provides exposure to a concentrated number of high quality companies with visible earnings. It is on the Chelsea Selection. Janus Henderson UK Responsible Income, meanwhile, has a bias towards mid-caps. The manager, Andrew Jones, looks for a balance of growth, as well as an attractive income.
Investment funds
Some investment funds – especially those with a global remit – may have significant weightings in healthcare companies as part of a diversified approach.
The Baillie Gifford Global Discovery fund, managed by Douglas Brodie, is a prime example, with 44% of assets from the healthcare sector***. These include four of the 10 largest stock positions: Alnylam Pharmaceuticals, STAAR Surgical, Novocure, and Exact Sciences***.
Alnylam Pharmaceuticals is a pioneering US firm known for leading the translation of RNA interference (RNAi), while STAAR Surgical makes implantable lenses for the eye. Novocure, meanwhile, is an oncology company that’s pioneering a therapy for solid tumours, while Exact Sciences specialises in the detection of early stage cancers.
Of course, there are funds specialising in healthcare. For example, AXA Framlington Biotech, as its name suggests, focuses on biotechnology, genomic and medical research. Its manager, Linden Thomson, can invest globally, but tends to be biased towards the United States as this is where most biotechnology companies are based.
Then there’s the Polar Capital Healthcare Opportunities, another Chelsea Selection fund. This fund itself offers a blended portfolio, and an investor can get exposure to everything from stable, big pharmaceuticals, to the best biotechnology opportunities. Its unconstrained and concentrated approach offers a great opportunity for investors to get specialist exposure.
*Source: companiesmarketcap.com, 5 April 2023
**Source: UnitedHealth Group, 2022 results
***Source: Fund factsheet, 28 February 2023
****Source: Novo Nordisk, company announcement 1 February 2023
*****Source: AstraZeneca, full year and Q4 2022 results, 9 February 2023
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice. The mention of specific securities and funds is for illustration purposes only and not a recommendation to buy or to sell.