Amid volatility, healthcare’s appeal grows
Portfolio Manager Andy Acker discusses healthcare's first-quarter performance and why the sector could offer both defence against market volatility and opportunities for long-term gains.
Key takeaways:
- Healthcare’s non-cyclical industries, such as pharmaceuticals, helped the sector to outperform during a challenging first quarter.
- But a year long sell-off in small- and mid-cap biotech stocks continued as investors worried about rising interest rates.
- In our view, depressed valuations and accelerating innovation make biotech particularly attractive for long-term investors, while other areas of healthcare could shine near term.
Health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.
Volatility measures risk using the dispersion of returns for a given investment.
Healthcare stocks declined during the first quarter, but held up better than the broader markets. I think this was really due to the defensive characteristics of much of the healthcare sector. We’re now in a rising-rate environment with concerns about a slowing economy, and the defensive characteristics of healthcare, especially certain sub-sectors, really stand out in this kind of environment. So, in the first quarter, we saw, for example, large-cap pharmaceutical companies, drug distributors and health insurance companies – that really function almost independently of economic activity – all outperform during the quarter.
Biotech stocks in the last year have seen one of the biggest drawdowns on record on an absolute basis and, by far, the largest we’ve ever seen on a relative basis. This has been driven by a number of factors, from concerns about rising interest rates to concerns about potential reform of drug prices.
In many cases, we believe these concerns are overdone, and the valuations in the sector look extremely compelling to us, with many companies trading below the levels of cash on their balance sheet and others trading as if they have very little in their pipelines, even if we think they have real innovation that could have a significant impact on human health.
Despite the drawdown in biotech, we believe innovation in the sector is alive and well, and not only that, it is actually accelerating. We’re expecting to see major new clinical trial results in very important areas like cancer, Alzheimer’s disease, obesity, diabetes, muscular dystrophy, just to name a few. And we think the next few decades could be some of the most important in terms of real innovation that can change the practice of medicine.
We also could see significant M&A [merger and acquisition] activity pick up again after a period of really subdued activity, and this is driven by two factors primarily. First of all, major pharmaceutical companies will have over $500 billion in cash on their balance sheets and many of them have pipelines that need refilling. We also have many biotech companies, again, that are trading at very discounted valuations, in our view, so we do expect to see a pickup in activity and that could also relight excitement about the biotech sector.
That’s why, with the pullback that we’ve seen recently and with innovation thriving in the industry, we believe it’s an attractive time to be looking at the healthcare sector.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
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Important information
Please read the following important information regarding funds related to this article.
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund is focused towards particular industries or investment themes and may be heavily impacted by factors such as changes in government regulation, increased price competition, technological advancements and other adverse events.
- The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund is focused towards particular industries or investment themes and may be heavily impacted by factors such as changes in government regulation, increased price competition, technological advancements and other adverse events.
- The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
Key takeaways:
- Healthcare’s non-cyclical industries, such as pharmaceuticals, helped the sector to outperform during a challenging first quarter.
- But a year long sell-off in small- and mid-cap biotech stocks continued as investors worried about rising interest rates.
- In our view, depressed valuations and accelerating innovation make biotech particularly attractive for long-term investors, while other areas of healthcare could shine near term.