By Vincent Ropers, co-portfolio manager of the TB Wise Multi-Asset Growth fund
The start of 2022 has been anything but plain sailing for investors, with Russia’s invasion of Ukraine unleashing further volatility on markets already grappling with soaring inflation and rapidly shifting central bank policies.
While heightened geopolitical and macroeconomic uncertainty has naturally led investors to pivot portfolios towards more defensive assets such as commodities, this environment may unearth attractive opportunities in a number of high growth sectors with comparatively strong value prospects.
For discerning investors able to act opportunistically, the healthcare and biotechnology sectors seem particularly compelling. Both spaces appear to have been unjustifiably punished post the Covid-19 rebound, and look particularly attractive both from an absolute and relative valuation standpoint.
Moreover, the sectors are underpinned by structural long-term growth drivers that show no signs of abating.
Biotech on sale
The biotechnology sector in particular has rarely been cheaper. In fact, about 16% of the businesses in the NASDAQ Biotechnology Index – perhaps the most recognised biotech indices, home to more than 300 global companies – are trading at negative enterprise values.
This means a considerable number of leading biotech players have valuations lower than the value of cash on their balance sheets, which provides investors with an attractive buffer. While the current biotech discount is significant, analysis into the investment nature of the space indicates price volatility is fairly common, and the sector is likely due a considerable upswing.
Both the biotech and healthcare spaces enjoyed substantial rallies last year on the back of Covid-19 breakthroughs from leading players such as Moderna. This highlights the largely sentiment driven nature of investment in the sectors.
Often, the announcement of groundbreaking new treatments fuels a wave of optimism in the potential for future cures, which sparks a flood of investment into the sector. This influx of cash and optimism then usually fades once a more realistic picture of the treatment’s potential impact emerges.
In addition, swathes of investors move in and out of the biotech sector based on their risk appetite.
As such, the biotech and healthcare sectors experience pronounced investment cyclicality. Investors must be wary of this characteristic, but certainly not afraid – there remains huge opportunity in the sectors.
While the healthcare and biotech sectors are vulnerable to valuation swings, they are certainly not flawed from an investment perspective. Both spaces are in fact supported by solid long-term growth drivers.
One key growth fundamental underpinning both sectors on the demand side is an ageing global population. According to the office for national statistics, in 2015 there were about 901 million people aged 60 years and over worldwide, representing 12.3% of the global population. By 2050, this figure is predicted to reach 2.1 billion, or 21.3% of the global population.
An ageing population, in combination with less economically developed countries demanding better access to healthcare, should drive strong demand for the products and services delivered by the healthcare and biotech sectors.
Meanwhile, on the supply side, both sectors stand to benefit from scientific innovation continuing to expand at an exponential pace. In the US, the Food and Drug Administration approved close to record numbers of drugs in both 2020 and 2021 – even in the face of obstructive Covid-19 restrictions.
These drivers are broadly unaffected by macroeconomic conditions, and should therefore fuel an attractive runway for long-term growth for biotech and healthcare businesses that possess sound business fundamentals.
In addition, both the biotech and healthcare sectors have recently proven themselves highly cash generative, despite them being high growth. Analysis suggests this has not yet been priced into valuations for many of the compelling companies operating in the space. As such, investors should consider taking advantage of the current biotech and healthcare discounts to tap exciting businesses at highly attractive valuations.
Prior to the Russian invasion, we initiated a holding in the Worldwide Healthcare Trust, which increased our allocation to the healthcare and biotechnology sectors. In addition, we took advantage of its low valuation to add to our holding in International Biotechnology Trust, a specialist investor that invests in both quoted and unquoted biotech innovators across the globe.
Gaining exposure to the biotech and healthcare spaces via investment trusts seems prudent. Having confidence in the managers and strategies we invest in is a key pillar of our investment process, and this becomes even more crucial given biotech and healthcare are particularly complex sectors.
Specialist expertise is critical to truly gauge whether a business with perplexing scientific fundamentals is fairly priced by the market.
For example, the portfolio managers at International Biotechnology Trust draw from their extensive scientific backgrounds when analysing businesses.
This enables them to form a well-rounded image of a company’s growth potential – including analysis of its management capability, macroeconomic context and competitor environment – while also taking into account detailed analysis of its pipeline of innovation, which often involves assessing complex clinical trial data.
Therefore, via closed ended trusts, investors can access the attractive opportunities on offer in the biotech and healthcare sectors with confidence the long-term growth prospects of companies have been properly measured.
As both of the trusts we own trade at abnormally wide discounts, they also allow us to access the sector at a double-discount, making it even more appealing.