The year 2021 has not been kind to investors. It’s difficult to recall a time when so many macro-political uncertainties have converged. The stock market appears to be flailing around like a wounded animal, veering from one performance driver to the next (value, growth, momentum, etc.). The FTSE 100 is up around 7% year to date as of this writing. In dollar terms, it is up a little more than 8%, but, like the pound, it fell into negative territory in August before rebounding. Investors are told that the market is either cheap or expensive and that a recession is either coming or not coming. Where can one find a stable outlook in the midst of so much apparent confusion? Isn’t there somewhere that can provide growth, yield, and a reasonable price?
Few things in life are certain, but some axioms hold true: our world is becoming increasingly crowded, and people are getting older on average. The elderly consume the majority of healthcare resources because a longer lifespan comes with a higher risk of chronic disease later in life. Health spending rises faster than GDP in developing markets, as the emerging middle-classes have the time and resources to focus on staying healthy. The result of all of these factors is unstoppable demand growth. Simply put, healthcare is our era’s secular growth story, and it’s only going to get bigger as medical breakthroughs and new technologies open up new ways to alleviate human suffering.
There is, as always, a snag. The developed world’s healthcare systems were not designed to deal with this elderly, morbid population, and healthcare spending has been rising as a percentage of GDP, eroding our productivity gains. If the system is not reformated, this trend will continue.
The myth that the NHS needs more money is purely political; more money will not magically produce trained doctors and nurses, nor will it tame the beast of rising medical costs above inflation. However, one does not have to accept this fate – a slew of new technologies have convincingly demonstrated that the healthcare treatment paradigm is ripe for change, with better care and lower costs. Not only will society benefit from this profound revolution, but investors will also benefit as well.
BB Healthcare Trust, our fund, was established in late 2016 to profit from this necessary and unavoidable healthcare transformation. We oversee a concentrated portfolio of operationally oriented exposures to key areas undergoing significant transformation. These changes will most likely begin in the United States, but they will spread worldwide. However, the winners will be a very different set of companies than those whose incremental innovations in drugs and medical devices have powered portfolios in recent decades, so our fund is unconstrained and can invest in relevant adjacent areas like technology and consumer products. We focus on total return, but we also pay a dividend out of capital because many of these companies do not pay dividends for decades, if at all. This also enables us to provide a competitive payout in a world where yields are scarce (particularly ethical or sustainable income – how much of the FTSE’s yield comes from extractives and tobacco?).
Electronic triage (e.g., Teladoc), robotic surgery (e.g., Intuitive Surgical), genetic testing, and molecular diagnostics are among the companies and themes driving our fund (e.g., Illumina). For many years, healthcare has been a contentious political football, but the NHS knows what the future holds, and politicians should leave well enough alone and let healthcare ‘heal thyself.’