Looking to the future of healthcare
One final area of sustainable healthcare investment which is important to touch on is the future. While access and affordability in underserviced markets remain powerful long-term drivers for growth in sustainable healthcare companies, COVID-19 has given us a window into the challenges the health system faces and has also accelerated some positive trends.
Tele-health and the ‘internet of things’ as it relates to medical devices, has seen accelerated adoption in healthcare in the same way as work-from-home arrangements in business. We believe companies like Philips are well positioned for this trend, following a corporate restructuring, including divestment of the household appliances they are better known for.
We believe Philips holds leading market share and technological advantages in their connected care, diagnosis and treatment divisions, giving the company long-term tailwinds in the digitisation of health. This business opportunity can deliver better outcomes, greater access and lower costs. Studies by Philips and others, include a five-year study which found significant benefits, such as 26% fewer ICU deaths11 through the use of these technologies.
The second area is genetic diagnosis and treatments. In this regard, we believe Illumina is the clear leader in gene sequencing technologies that are used by scientists and researchers across life sciences, oncology, reproductive health and other emerging segments. From diagnosing rare diseases to understanding the biodiversity in our ecosystems, Illumina is helping to unlock the power of the genome.
Their technology advancements have helped to reduce the cost of sequencing a human genome from US$1m in 2007 to less than US$600 today and they are pushing to reduce this to just US$100 per person.7 The company has an innovative and ethical culture and a high-quality supervisory and ethics board. It earns significant recurring revenues from the sale of consumables and services and is benefitting from the growth in preventive healthcare and personalised medicine.
Current portfolio positioning
While our healthcare investment by GICS classification ranges from 3% to 29% across strategies12, our approach to healthcare investment indicates that we:
- Invest in more companies contributing to good health and wellbeing outcomes than is indicated by the GICS sector.
- Completely avoid the mega-cap, big pharma companies which comprise a substantial proportion of the MSCI AC World index’s health care companies.13
The best way to view our healthcare exposure, at least as we see it, is to filter the interactive portfolio map on our microsite by Sustainable Development Goal 3 – Good Health and Wellbeing, as it provides a complete list of holdings across all strategies and our reasons for investing in them.
The investment implications of our approach are twofold. Firstly, different to popular perception of healthcare performance during 2020, COVID-19 didn’t lift all of our healthcare companies but roughly split our holdings into relative ‘winners’ through stimulated demand, for example in diagnostics, and ‘losers’ through deferred demand for anything to do with elective surgeries. As these trends reverse we expect the short-term implications for our companies could be the same. However, none of our investments were made with COVID in mind or to ride a COVID wave, rather like all our investing, it was focused on the long term, where we still invest on the expectation that all the companies we invest in will do well.
The second implication relates to valuation and whether healthcare as a sector is currently overvalued or whether we are overexposed. We are concerned by valuations across the market; indeed a core part of our investment philosophy is capital preservation. In this respect, our healthcare companies are similar to every company we invest in. They are high quality, offer reasonably predictable growth supported by long-term sustainability tailwinds and carry less debt.
Healthcare investment offers opportunity and impact, but not by ticking a box
Systemic issues and the practices of some companies can make healthcare investment a challenge for sustainable investors. But finding business models which succeed by reducing costs and increasing access, can produce real benefits in global health systems and for investors.
While ethical and long-term stewardship are fundamental requirements for all the companies we invest with, in healthcare it is literally the difference between life and death. However, these qualitative factors cannot be metricated, and do not appear in ESG scores. Nor should they be taken as a given because a company appears in a given GICS sector. They can only be assessed over time, with experience and mistakes as guides.