Thriving in the pandemic: healthcare

Covid-19 is arguably the greatest challenge the world has faced since the Second World War, threatening our health and wellbeing and drastically impairing everyday life. It is no surprise that the healthcare sector outperformed strongly through the initial crisis and our sustainable funds benefitted from this. Yet this is no guarantee of future success: a thoughtful approach is needed and active investment will be a key tool.

Healthcare can be broadly divided between pharmaceuticals, medical devices and health insurers. We tend to steer away from the last category as we have found the link between their businesses and improved patient outcomes less easy to define, given the competing requirements of claims management and patient treatment. Besides, there are more than enough opportunities and plenty of innovation in the drugs and devices subsectors.

As sustainable investors, we support the transition to a cleaner, healthier, more inclusive and safer society. Healthcare will be central to this and ‘next generation medicine’ is one of the key themes in our portfolios. Innovation is at the core of many social and environmental improvements, and the pharmaceutical and medical device sectors are driven by research and development (R&D) and innovation.

Despite huge progress in recent years, current diagnosis methods and treatments are slow and often ineffective. There are significant disease categories where there has been little progress in reducing mortality – apart from the human tragedy, the financial costs of late-stage treatments and care are huge. The ability to extract more accurate and timely health information from our bodies, including our individual genetic profile, offers the opportunity to significantly enhance healthcare standards and outcomes.

High mortality rates often result from slow diagnosis – it is much harder to treat cancer and other illnesses if diagnosed late, so accelerating diagnosis is crucial. The market didn’t like the recent acquisition of Grail by Illumina (which we own), yet we are excited by the prospects for its liquid biopsy process to accelerate the identification of some types of cancer through blood samples. This could transform outcomes for otherwise late-stage diagnosis, such as for pancreatic cancer.

There are similarly powerful innovations in treatment, including altering our immune system to improve its ability to fight disease. In this area, we prefer pharmaceutical companies with broad R&D capabilities and a focus on key therapeutic categories such as cancer and diabetes. Just as we don’t tend to invest in tech IPOs, neither do we seek esoteric opportunities in the biotech sector – big pharma stocks, such as AstraZeneca, diversify the risks across their product portfolios. Roche goes further, adding leadership in diagnostic testing.

As with all sectors, we try to identify the most exciting themes, then seek the lowest-risk way to invest in them. Just like technology, we don’t try to invest in all healthcare stocks, focusing on those that meet our demanding sustainable and financial criteria.

Healthcare is a dynamic and innovative sector, but the subsector that has arguably changed the most in recent years is medical devices. The sector traditionally addressed areas such as replacement joints or wound management, but has transformed through innovative technology and engineering. Robotic surgery (Intuitive Surgical), aortic heart surgery that is conducted through the patient’s veins (Edwards Lifesciences) and myriad other techniques are leading to less invasive surgery, lower recovery times and more consistent patient outcomes.

Technology is transforming every aspect of our lives and healthcare is no exception. Its impact is being felt across the board, but stands out in two areas in particular. It has transformed R&D processes and laboratory testing, led by companies such as Thermo Fisher Scientific and Agilent Technologies. Whether through remote patient monitoring (Philips) or the increased use of wearables, it is also transforming healthcare and health awareness through data. “Health is the new wealth” and awareness of health data and information is another trend that has accelerated in the pandemic.

Covid-19 has catalysed changes that were already underway. Healthcare is no different and we will continue to stick to the investment ideas that we had in place before the pandemic. We believe that investors will be best served by long-term thinking and an active investment approach with strong risk management.

It certainly isn’t about picking the winner in the race for a vaccine. While I’m pleased that AstraZeneca is working with researchers at Oxford University to develop a vaccine, this hasn’t changed my investment view of the company. Indeed, as a sustainable investor, I’m delighted that it has committed to selling this vaccine at cost, thereby making no profit on it. It‘s the right thing to do.

Mike Fox is Head of Sustainable Investments at Royal London Asset Management. Find out more about our range of sustainable funds – including the recently-launched RL Global Sustainable Equity Fund – at rlam.co.uk/sustainable

For professional clients only, not suitable for retail investors. Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice. Portfolio characteristics and holdings are subject to change without notice. This does not constitute an investment recommendation. For more information on a fund or the risks of investing, please refer to the fund’s factsheet, Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.co.uk

All information is correct at October 2020 unless otherwise stated. Issued by Royal London Asset Management Limited, Firm Registration Number: 141665, registered in England and Wales number 2244297; Royal London Unit Trust Managers Limited, Firm Registration Number: 144037, registered in England and Wales number 2372439; RLUM Limited, Firm Registration Number: 144032, registered in England and Wales number 2369965. All of these companies are authorised and regulated by the Financial Conduct Authority. Royal London Asset Management Bond Funds Plc, an umbrella company with segregated liability between sub-funds, authorised and regulated by the Central Bank of Ireland, registered in Ireland number 364259. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland. All of these companies are subsidiaries of The Royal London Mutual Insurance Society Limited, registered in England and Wales number 99064. Registered Office: 55 Gracechurch Street, London EC3V 0RL. The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The Royal London Mutual Insurance Society Limited is on the Financial Services Register, registration number 117672. Registered in England and Wales number 99064. Our ref: AL RLAM P 0026