Three funds for advancing healthcare

Daniel Lane
Daniel Lane
Fidelity Personal Investing30 November 2018

We’re living longer. Life expectancies around the world are rising and in no small part thanks to massive leaps forward in healthcare standards. From drug development, disease detection and eradication to pioneering research into artificial limb technology, the trajectory of discovery and treatment is only set to rise throughout this century.

With long-term demographic changes often hinging on eureka moments as well as sustained improvements in basic access to healthcare, particularly in developing markets, investors are becoming increasingly attracted to opportunities for returns in the sector.

Companies in the space range from experimental biotechs pinning their hopes on drug trial success to steady producers of long-term treatments and therapies. As a result, investors need to be highly selective in their allocation to the sector and stay on top of evolving business models, treatment studies and more recently, governmental intervention into pricing and supply. For most, this volume of attention is impossible. Fortunately, the Select 50 has a number of funds exposed to the sector while remaining diversified to spread risk. Here are three managers with notable healthcare names among their portfolios’ top holdings.

Fidelity Enhanced Income

Fund manager Michael Clark holds popular UK pharma firms AstraZeneca and GlaxoSmithKline in the pursuit of generating a premium income versus the FTSE All-Share while preserving investors’ capital.

Both companies seek to develop medicines for a vast range of conditions, with GSK also producing retail products like Night Nurse and Sensodyne toothpaste.

Big, familiar dividend payers, the companies fit well with Clark’s aims, although the manager’s overall strategy might be new to some equity income investors.

Clark explains: “We invest in companies that pay sustainable and growing dividends. We aim for a 7% yield, although that’s not guaranteed, of which 5% tends to come from these companies. The other 2% comes from covered call overwriting where we generate a premium on a systematic basis. That’s the enhancement process.”

Away from the options strategy, Clark is still interested in growing companies that generate a lot of cash out of their operations to allow them to pay a dividend as well as invest in themselves. This means the fund may be of interest to investors aiming for a consistent high yield from their investments while keeping an eye on capital preservation.

So what’s more important to the manager: growth or income?

He explains: “We’re looking for both actually. We need the income obviously but we need a company that can grow; where we can make a forecast about it, where we can say that in three, four or five years’ time that it will be bigger than it is today and will be generating significantly more income than it is today.”

Jupiter European Special Situations

Focusing on the fundamentals, Cédric de Fonclare looks for companies whose growth expectations are mispriced by the market and who ought to grow faster than GDP. Then it’s a case of making sure he doesn’t overpay for that growth potential.

The approach is highly company-specific, rather than scanning at the sector or national level, and allows the manager to get in to the nuts and bolts of the companies he’s interested in. He explains: “We meet the management and have a broader view of the industry of our companies by meeting competitors, suppliers and clients to understand the shape of the industry.

“After that it’s about understanding what’s driving the business: Are they sustainable? How do they protect their profitability? What is the management’s strategy - are they willing to spend more money or return more money to shareholders?”

Companies ticking all the boxes include pharma and diagnostics firm Roche, German dialysis specialist Fresenius Medical Care, global diabetes treatment leader Novo Nordisk, and multinational pharma and life sciences group Bayer.

Invesco Perpetual European Equity Income

Stephanie Butcher’s European Equity Income fund also features Basel-based Roche as a top holding, and is joined by fellow Swiss multinational Novartis, one of the largest pharma companies in the sector. French multinational Sanofi also appears in Butcher’s top ten names as the manager seeks to grow investors’ money through a blend of capital growth and consistent dividend streams.

The politics of the past two years have destabilised investor confidence in Europe somewhat but Butcher remains resolute on the reasons to look past the headlines.

She explains: “At the end of the day we’re investing in corporates which have continued to deliver cash flows and yields and I think that’s where the opportunity lies; to move beyond the politics and focus on the companies.”

Talking a long-term view, she says is critical to investment success: “ I think it’s very easy to be thrown about by short-term news flow and volatility. It can be very disconcerting. But if you’ve done your investment process on the basis of investing in a company and been with them for three to five years it becomes much, much clearer where you’re aiming at. And therefore you know what you genuinely have to worry about, and what you don’t.

“Quite often I’ll know there’s a quarter coming up that won’t be great, but I don’t care, because I know that the company’s on track on a long term basis and I think that is the key to the process I use.”

An unwavering focus on valuation has long been the driver of income for the fund and there is absolutely no reason to change that in the face of political uncertainty – or any other uncertainties, says the manager: “Valuation is absolutely key to what we do. That’s the starting point. So we are agnostic as to sector or individual companies or factors beyond the valuation driver.

“We’re pretty pragmatic and we don’t have a pre-conceived idea of what are income sectors, if you like. And that’s meant we quite often move to areas that are maybe somewhat out of favour but they are also where you often get a really great combination of yield and under valuation, which can be quite a powerful driver of returns over time.”

More on the pharmaceuticals sector


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