A new age of innovation driving health stocks

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July 28, 2020
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August 3, 2020

MEDIA RELEASE: A renaissance of discovery and innovation within the global healthcare sector is likely to stimulate investor demand for health care stocks, according to American Century Investments®’ senior portfolio manager, Dr Michael Li. 

Scientific discovery is growing at a rapid pace in the health care field due in part to a more in-depth understanding of the human body after completion of the Human Genome project, lower genome sequencing costs, and enhanced capabilities of technology being applied in health care.   

“We have approximately 600 million people worldwide age 65 years and over, so there’s a rising demand for healthcare services, as well as increasing wealth levels in China and India in particular, to access health care. 

“This will place significant stress on healthcare systems, so we need to invest in infrastructure and capacity, but innovations in treatments and drugs will be a primary means to address the issue,” he said. 

Dr Li said healthcare company earnings are traditionally less cyclical than the overall market, and despite COVID-19 presenting challenges with some elective procedures being postponed, the earnings outlook remains strong. 

“The nature of the healthcare business is such that even during the global financial crisis, earnings for healthcare stocks still grew slightly, demonstrating that there’s less volatility in earnings. The current period does pose unique challenges with hospitals understandably prioritising cases of COVID-19 and delaying surgeries and patients becoming worried about infection at healthcare facilities, but certain procedures can only be delayed for so long. 

“Healthcare stocks tend to perform well irrespective of the cycle and have historically outperformed the market by almost two per cent on average, especially during periods when macro uncertainty is prevalent. When innovation delivers new products and services, it tends to outperform, and the current environment is especially conducive to innovation,” he said.

The healthcare sector is currently trading at a discount to both the broader market and its usual valuation so on that basis, the sector is quite attractive. In addition, investors are starting to recognise the value of innovation and agility of many health care companies.

While American Century Health Care Impact Strategy currently has most of its portfolio in U.S. health care companies demonstrating great potential of sustainable earnings growth and profitability, Dr Li also cites the growing emergence of innovation in other jurisdictions. 

“We’re fundamentally mindful of what’s happening in both the U.S. and globally. A lot of countries are investing considerable capital and resources into the healthcare space, and the level of innovation reflects this, particularly in parts of Europe and Asia,” he said. 

The strategy incorporates a mix of early-stage and more established health care stocks to sufficiently balance its risk. 

“Early-stage companies do present a higher risk and return profile but that’s to be expected. For each company, we evaluate their long-term sustainable growth potential and if that growth will also create a positive impact on society. For example, we review biotech and biopharma drug development pipelines and assess their market share potential and are particularly focused on companies addressing large unmet medical needs.  

“We also look for companies that are truly innovative and transforming how healthcare is being delivered, assessing the impact these companies can create for the patient,” he said.

The strategy uses a proprietary multi-factor model to rank health care stocks based on fundamental acceleration, earnings quality, relative strength and valuation. Each of the 30-50 stocks in the portfolio must be tied to the third United Nations’ Sustainable Development Goal, which is to ensure healthy lives and promote well-being for all at all ages.