InvestmentsJul 11 2016

Fund Review: Schroder Global Healthcare

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John Bowler, who has managed the fund since 2004, explains: “We do this by combining top-down analysis of the four healthcare sub-sectors: pharmaceuticals, medical services, medical supplies/devices and biotechnology, with bottom-up stock research of companies within these sub-sectors.”

The manager says he seeks companies that he expects to deliver future earnings growth above the level expected by the market, describing it as a positive “growth gap”.

“These companies are expected to outperform once the market recognises stronger earnings growth characteristics. In constructing the portfolio, [the team] looks to maintain a broad exposure, without significant biases relative to benchmark at a sub-sector level. In doing so, we believe positive performance outcomes should be more consistent over time and the fund should deliver better risk-adjusted returns,” he adds.

The core principles of the process have been maintained since Mr Bowler took over the fund, although he adds improvements have been incorporated where appropriate.

In terms of macroeconomic influences, the manager notes: “We believe the most effective way to use macroeconomic information is as an input at the individual stock level, rather than as a top-down overlay. [The team] pays close attention to the macro environment when constructing the fund, but this is a secondary consideration to bottom-up stock selection.”

The fund’s Z share class sits at a level five out of seven on the risk-reward scale, while the ongoing charges are 0.92 per cent, according to the key investor information document.

For the five years to June 30 2016, the fund has delivered a return of 129 per cent compared with the IA Global sector average of 41.6 per cent, data from FE Analytics shows. The fund has also outperformed the sector across one-, three- and 10-year periods, including a 10-year return of 229.6 per cent against the sector average of 79.1 per cent.

Mr Bowler does note, however, that the robust long-term performance has been affected by weaker returns year to date. “In the run-up to the end of 2015, expectations of the Fed rate rise marked a turning point, as historically the first rate rise leads to healthcare underperforming other sectors. Exacerbating this was the rhetoric, driven by the US presidential election, targeting some of the extreme cases of US drug pricing. Both of these were negative for sentiment, which has seen the sector underperform, with consequences for the fund’s performance also.”

EXPERT VIEW - Rob Morgan, pensions and investment analyst, Charles Stanley Direct

This is a broad healthcare fund incorporating pharmaceuticals, medical services and related sectors. It was formerly called Schroder Medical Discovery until a change of name in 2012, which did not affect the investment objective or approach. Performance since manager John Bowler took the helm in March 2004 is slightly ahead of its benchmark, so it does merit consideration for investors preferring an actively managed investment in this area.

But he adds: “We believe the sell-off has been overdone in some areas and has presented some interesting opportunities. In particular, we have been building small positions in a number of stocks in the mid-cap biotech space where we see near-term catalysts.”

The manager notes some of the key positive drivers of performance have been the overweight positioning in “innovators of healthcare provision”, including UnitedHealth and Fresenius Medical Care. “The other main contributor has been the underweight in the US specialty pharmaceutical names Endo and Valeant. These are controversial names that have had to change their pricing policy in response to political scrutiny.”

In terms of detractors to performance, Mr Bowler highlights the underweight position in Johnson & Johnson, as “the sell-off in perceived riskier assets, such as biotech, has seen money allocated towards Johnson & Johnson as the sales headwinds – from patent expiries and falling Hepatitis C franchise – abate”.

Looking ahead, the manager points out the ‘Brexit’ vote in the UK “has forced the market to revisit quality growth, which is benefiting healthcare”. He highlights that the key themes the fund is exposed to are: the new innovation cycle, which is driving a recovery in Food and Drug Administration new drug approvals in pharma and biotech names; and innovation in healthcare delivery.

“I believe both drivers are sustainable – the consistent pressure on demand from demographics and the consistent pressure from limited government budgets necessitates innovation in healthcare delivery in order to meet expectations,” he explains.