Insights

What fascinates you most about the healthcare sector as a portfolio manager?

Health is the be-all and end-all for all of us, which is why it is exciting to look at investments in the healthcare sector. In addition to its social relevance, there are three other aspects of the healthcare sector that fascinate me: the complexity of the business models, the diversity of the sector, and the innovation of the companies.

First, healthcare is more complex than other sectors for a number of reasons. The products are difficult to understand and there are a large number of stakeholders. These include patients, insurers, regulators and companies. That’s why I believe that, as an expert, you can add value for clients. In addition, the sector is very diverse and varied with its sub-segments of pharma and biotech, medical technology, life sciences and healthcare services. This makes the analysis exciting and you are constantly learning new things. Finally, I am fascinated by the innovative power of the sector. On a personal level, it’s exciting to see how many innovations the sector produces every year. Patients and we as a society benefit from this. From an investor’s perspective, innovative companies can build strong competitive positions and generate above-average growth.

You mentioned different sub-sectors within the healthcare sector. How do they differ from an investor’s perspective? Which of these sub-sectors do you favour in the current environment?

The main sub-sectors in healthcare are pharmaceuticals, medical technology, life sciences, biotechnology and healthcare services. We find many exciting companies in medical technology. Innovation in this segment is very high, competition in larger end markets is often limited to three or four companies and the growth profile is attractive, for example because, unlike pharmaceutical companies, there is no need to compensate for patent expiries. We also find many niche players in the small-cap segment that can grow strongly in their markets and have established good competitive positions. Pharmaceutical companies, on the other hand, grow more slowly on average than companies in other market segments. This is mainly due to the size of these companies and the fierce competition they face. Nevertheless, companies such as Eli Lilly, Novo Nordisk and AstraZeneca have been able to achieve attractive growth rates in recent years and create significant value for their shareholders.

How has the sector performed over the past year and what makes it interesting for investors at the moment?

The global healthcare sector delivered a positive return last year, but underperformed the broad equity market. Interestingly, the performance gap only widened in the fourth quarter. In the run-up to the US elections and in anticipation of another Donald Trump presidency, cyclical segments of the market were more sought after by investors, rising interest rates acted as a headwind and, most importantly, the nomination of Robert F. Kennedy Jr. as Secretary of Health and Human Services caused great uncertainty among investors in the sector. These sharp moves in the fourth quarter of 2002 – a rising stock market and falling healthcare stocks – have left the sector trading at its cheapest valuation relative to the broader market in 20 years. The fundamental trends in healthcare are solid and we believe some political concerns are overdone. Surveys of fund managers also show that investor positioning in the sector is historically low. This is a good starting point for positive performance this year.

What long-term trends do you see in the healthcare sector and where do you see the biggest opportunities for investors in the coming years? Are there any current developments or trends in the healthcare sector that investors are currently overlooking?

The major trends in the sector are well known: an ageing population is driving demand, and rising prosperity in developing countries has historically led to increased healthcare spending relative to economic output. Beneath the surface, however, we are seeing much more exciting trends in the industry that can benefit patients, companies and shareholders alike. In the pharmaceutical industry, for example, we are seeing more and more biological drugs replacing traditional chemical preparations because they are more targeted and have fewer side effects. Innovation is increasingly taking place in smaller, digital companies, which are more dependent than large pharmaceutical companies on external service providers such as contract manufacturers. However, large pharmaceutical companies are also outsourcing more and more of the value chain. Compared to other sectors, such as automotive, healthcare is still in the early stages. We believe we are also in an exciting phase in medical technology. Robot-assisted surgery is becoming increasingly popular, and more and more operations are being performed using minimally invasive techniques. In addition, reimbursement systems are slowly but steadily changing, particularly in the US. We see the reimbursement of healthcare services becoming increasingly dependent on the success of the treatment.

You manage the Berenberg Health Focus Fund. What is special about this fund and how does it differ from its competitors?

With the Berenberg Health Focus Fund, we are more active than our competitors. Many established sector funds are very benchmark driven. Our investment process and the active selection of individual stocks set us apart. We select 35-50 stocks in the fund, which is much more concentrated than most of our competitors We also have a stronger focus on growth. We select companies that can generate significantly above-average growth over the medium to long term. Companies that are not growing attractively are of little interest to us. We therefore also look for opportunities in the small-cap segment, where there are many niche players with strong growth prospects. Finally, we do not invest in deficit-ridden and high-risk business models. For this reason, small biotech companies are not given much consideration in the fund. Finally, our aim in the Healthcare Fund is to invest in companies that benefit from the “micro-trends” in the healthcare sector discussed above and have a strong market position. We are optimistic that these companies will be able to generate attractive and sustainable growth over the long term.