InvestmentsOct 6 2014

Fund Review: Invesco Global Health Care fund

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Launched more than 30 years ago, the Invesco Global Health Care fund aims to deliver long-term capital growth by accessing the industry’s primary four sub-sectors, namely biotechnology, services, devices and pharmaceuticals.

Manager Derek Taner, who has been in the driving seat since 2006, typically maintains exposure to all four, noting that since 1996, with the exception of 2006 and 2010, at least one of the four sub-sectors has outperformed the wider market.

Benchmarked against the MSCI World Health Care index, the fund has some 70 per cent of its assets in US firms, with the rest spread across the globe. “We are trying to beat the index with less volatility, whereas most of our peers tend to compete against each other,” he adds.

The fund is at level five on a risk-reward profile and has ongoing charges of 2.48 per cent.

When it comes to picking stocks, Mr Taner employs a variety of different screen tests, but a common factor he is looking for is value. He says: “By value, I mean we seek out firms which have seen, unfairly, a fall in their shares where nothing has fundamentally changed in the company but they have been misunderstood by the market.”

Getting in early on such opportunities gives the manager the chance to make a profit when the market eventually comes back around. “You have to be thinking 12 months from now, and asking ‘what will people be saying about this firm?’.”

Given the nature of healthcare, macroeconomic factors tend to be in the background but Mr Taner admits that while the vast majority of his work is bottom-up, there is still a top-down element, adding: “The healthcare sector, in general, is a defensive growth industry. It tends to be fairly consistent regardless of the market backdrop.”

Right now the Invesco manager says he has three themes playing out across the fund, including biotech, M&A and US healthcare reform – ‘Obamacare’. In terms of the first, Mr Taner says: “Around 2000 there was a lot of excitement around biotech but it turned into a bubble; 14 years later, it is finally coming to fruition. We are close to 10 per cent overweight on biotech, with the emphasis on large caps such as Gilead and Biogen.”

Mr Taner cites the leaps and bounds that have come on treating diseases, noting that hepatitis C is finally being cured, while cancer treatments have made hugely significant progress. He adds: “The research coming out right now is compelling. There are new ways of treating cancer, such as immuno-oncology, which helps people’s immune systems fight cancer.”

Significantly, the US Patient Protection and Affordable Care Act (PPACA) will see a huge amount of cash injected into the industry over the coming decade, which will benefit the sector as a whole, especially hospitals, which represent another overweight for the manager.

Like many of his competitors, the softer backdrop has helped boost performance, and in the five years to September 15, the fund has delivered a return of 100 per cent. But in spite of the three-figure achievement, the fund is still some distance behind the MSCI World Health Care index, which is up 132 per cent over the period, according to data from FE Analytics. For its part the biotechnology sector has been a big driver of returns for the fund of late, with the US Nasdaq Biotech index up almost 30 per cent over the past 12 months.

But the hospital sector, too, has played a big part, with values rising “from anywhere between 37 to 73 per cent in the past 12 months”.

In terms of investment decisions that have held back the fund’s performance, Mr Taner admits that being invested in development-stage bio-pharmaceutical company Repros did not pay off in the way he had hoped. In contrast he adds that by not holding AstraZeneca when US giant Pfizer made a play for it earlier this year was not great to watch given the share price hike.

Mr Taner, however, is very upbeat in his outlook. He says: “I am still very positive on the sector – chiefly because of the three themes. ​These are long-duration tailwinds and valuations are not stretched. Patent expiration cycle is behind the industry and pipelines are pretty robust.”

EXPERT VIEW

Darius McDermott, managing director, Chelsea Financial Services

Run by Derek Taner since 2006, this fund has underperformed its benchmark over one, three and five years. The fund has been underweight pharmaceuticals, which has hit performance. The positions in biotech have made a positive contribution. Conversely, the healthcare services sectors, as well as the fund’s cash position, detracted from performance. In spite of an underweight position in the pharma sector versus the benchmark, it is the fund’s largest exposure. Taner continues to focus on speciality pharma and biotech stocks based on their compelling research pipelines and M&A potential.