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Fund Review: Healthcare funds

Introduction

There are very few funds and investment trusts that specialise in the healthcare sector specifically, though. A quick search of FE Analytics with funds that have ‘healthcare’ in the title suggests there are only four open-ended investment vehicles and two investment trusts investing solely in healthcare firms.

However, the performance of the MSCI World Healthcare 10/40 index in the year to September 23 2014 indicates there are some strong returns being generated by the sector.

The index outperformed the MSCI World, the FTSE 100 and the S&P 500 indices over the 12-month period to September 29, delivering a return of 23.96 per cent, against 10.80 per cent, 5.69 per cent and 17.73 per cent generated by the MSCI World, the FTSE 100 and the S&P 500 indices, respectively.

Healthcare firms – in particular the large pharmaceutical companies – have been making headlines so far in 2014 following US group Pfizer’s failed bid for UK drugs giant AstraZeneca.

A recent report by Fidelity Worldwide Investment about mergers and acquisitions (M&A) claims that healthcare deals have been “prominent drivers” of global M&A activity.

The report states: “Dealmaking in pharmaceuticals led the healthcare sector in the first half of 2014, commanding 18 per cent of announced M&A and already beating the full-year record for M&A in the sector set in 2007 ($274.8bn).”

Sam Isaly, co-manager of the Frostrow Capital Worldwide Healthcare Trust, says M&A activity in the healthcare sector has been increasing in the past two decades.

Says Mr Isaly: “M&A is common. Sometimes it has been big companies getting together but more frequently the big companies are aligning with small [firms], either in collaborations or just plain takeovers to access technology that they have not been able to gain, or to enhance what they have developed in-house. So that’s going to continue.”

A significant development in the healthcare industry in the US is the launch of Obamacare. This is president Barack Obama’s scheme to introduce more affordable healthcare and should create more investment opportunities for managers of healthcare funds and investment trusts.

Mr Isaly adds: “It will make the US look a little closer to the UK in terms of national health coverage.”

According to the latest Henderson Global Dividend Index, dividends paid out by companies in the healthcare and pharmaceuticals sector are on an upward trajectory.

Dividends from these companies totalled $23.4bn (£14.4bn) in the second quarter of this year, up from $21bn in the same quarter a year earlier.

Within the sector, pharmaceuticals and biotech companies have been among the biggest dividend payers, paying out $19.9bn in the second quarter of 2014, with the other $3.5bn coming from healthcare equipment and services companies.

The healthcare sector could provide some opportunities for investors with a long-term view.

THE PICKS

Polar Capital Healthcare Opportunities

This is a relatively concentrated fund of 40 to 45 holdings in companies within the global healthcare industry. Managers Daniel Mahony and Gareth Powell, who have run the fund since its launch in 2007, aim to preserve capital and achieve long-term growth. The $834.6m (£514.2m) fund is biased to large-cap stocks, which currently account for 62.4 per cent of the portfolio, with mid-caps making up 22.6 per cent and small-caps 15 per cent. It has generated a return of 171.43 per cent to investors in the five years to September 23 2014, according to FE Analytics.

Polar Capital Global Healthcare Growth and Income

This investment trust offering from Polar Capital has a net asset value of £197.5m. This fairly new investment trust vehicle, which launched in June 2010, is co-managed by Gareth Powell and Daniel Mahony, who are behind the Polar Capital Healthcare Opportunities fund. Their objective is to generate capital growth and income by investing in a global portfolio of healthcare stocks. In the three years to September 23 2014, the trust has returned 55.55 per cent compared to the 90.16 per cent return of its benchmark, the MSCI AC World Healthcare index.

EDITOR’S PICK

Fidelity Global Health Care

Hilary Natoff took the helm of this £459m fund in January 2006, although it was launched in September 2000. According to the fund factsheet, the manager has a preference for companies trading at attractive valuations, offering above-average growth relative to peers. Top overweight positions in the portfolio include Johnson & Johnson, Roche Holding and Gilead Sciences. The fund has underperformed its benchmark – the MSCI AC World Healthcare index – over one, three, five and 10 years. However, in the 10 years to September 23 2014, it has delivered a respectable 166.48 per cent return against the benchmark’s 182.67 per cent return.

In this special report

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