Periods of volatility are part and parcel of equity investing. This is why if you invest in this asset you should have a long-term investment horizon, meaning you can continue to hold through the volatility and eventually make good returns. And a way to increase the chance that your investments will deliver strong growth in the long run is to back a sector with the potential to grow over time.
Strong performance
Experienced managers
Long-term growth potential
Diversification
High-risk sector
One such example is healthcare. Medical advancements that will help to tackle illnesses such as cancer, diabetes and heart disease, assist ageing populations in the developed world, and provide cheaper essential drugs in the developing world, are a theme that is likely to grow. This means that companies involved in the research and development of these solutions are also likely to grow.
But getting exposure to the right companies is key, as healthcare, pharmaceuticals and biotechnology are sectors where companies live on the edge of success or failure. So it is worth paying for funds run by experienced managers who are more likely to determine which companies, products and drugs will succeed.
One such option is Polar Capital Healthcare Opportunities (IE00B3NLDF60) run by Dan Mahony and Gareth Powell. They have managed the fund since launch in November 2007 and also manage Polar Capital Global Healthcare Trust (PCGH). They have significant experience of analysing and investing in companies in the healthcare, pharmaceuticals and biotechnology sectors. Mr Mahony has covered US and European biotechnology, medical technology and healthcare services companies and was a research scientist prior to that. Mr Powell worked in the pharmaceutical sector and then managed a similar fund, AXA Framlington Biotech (GB00B784NS11) between 2004 and 2007.
Polar Capital Global Healthcare Opportunities invests in large and megacap healthcare companies such as Johnson & Johnson (US:JNJ) and Roche (SWI:ROG), which are among its 10 largest holdings. It also invests in research-focused smaller companies such as Bio-Rad Laboratories (US:BIO) and Loxo Oncology (US:LOXO). The fund is relatively concentrated and had 39 holdings at the end of December 2018, with the five largest ones accounting for 30 per cent of its assets.
Healthcare equipment businesses account for a quarter of the fund's assets and pharmaceuticals 23.7 per cent. However, the fund is underweight pharmaceuticals relative to its benchmark, MSCI All Country (AC) World Healthcare index, which has a 44.7 per cent weighting to this sector. This means the fund has performed very differently to this index.
Polar Capital Global Healthcare Opportunities has outperformed MSCI AC World Healthcare index over one, three and five years. And since launch, the fund has returned 444 per cent compared with 288 per cent for MSCI AC World Healthcare index and 142 per cent for MSCI AC World index.
The fund’s strategy of holding a mix of large and smaller companies, and having very different sector weightings to its benchmark, means it could add diversification to a broad global equity portfolio. Over 10 years, the fund has a correlation of 0.61 with MSCI AC World index, where 1 would mean the fund and index rise and fall perfectly in tandem. Some correlation is to be expected as both invest in global equities, but the fund's concentration in certain shares and sectors differentiates it.
The fund only has 10 per cent of its assets in biotechnology stocks, which can make very strong returns, but are also very high risk and volatile. While Mr Mahony and Mr Powell like to have some exposure to riskier high-growth stocks, they prefer stable large-caps that offer some downside protection.
However, this fund is far from risk-free. Although it has made stronger returns than MSCI AC World index, a broad global equity index, its volatility and that of MSCI AC World Healthcare index are materially higher. This means that over short periods the value of your investment in the fund could fall sharply, so you should not invest in it unless you have a long-term investment horizon and it should not account for a significant amount of your portfolio.
However, if you can hold for the long term, and want access to a growing sector via two managers who have demonstrated their ability to beat the market, Polar Capital Healthcare Opportunities ticks all the boxes. Buy. TL
Polar Capital Healthcare Opportunities Fund (IE00B3NLDF60)
| PRICE | 3,780p* | MEAN RETURN | 12.24%* |
| IA SECTOR | Specialist | SHARPE RATIO | 0.83* |
| FUND TYPE | Open-ended investment company | STANDARD DEVIATION | 13.67%* |
| FUND SIZE | £1.27bn | ONGOING CHARGE | 1.16% |
| No OF HOLDINGS | 39 | YIELD | 0.00% |
| SET-UP DATE | 30/11/2007 | MORE DETAILS | ucitsfunds.polarcapital.co.uk |
| MANAGER START DATE | 30/11/2007 |
Source: Polar Capital, *Morningstar at as 12/02/2019
Performance
| Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) |
| Polar Capital Healthcare Opportunities | 26.46 | 71.27 | 93.55 |
| MSCI AC World Healthcare index | 15.76 | 51.79 | 84.52 |
| MSCI AC World index | 6.17 | 63.73 | 71.78 |
Source: FE Analytics, as at 11/02/2019
Top 10 holdings as at 31/12/2018 (%)
| Johnson & Johnson | 9.4 |
| UnitedHealth Group | 6.0 |
| Abbott Laboratories | 5.6 |
| Medtronic | 4.9 |
| Roche | 4.2 |
| Novo Nordisk | 3.9 |
| AstraZeneca | 3.3 |
| Thermo Fisher Scientific | 3.1 |
| Bio-Rad Laboratories | 2.8 |
| Hill-Rom Holdings | 2.7 |
Source: Polar Capital
Sector breakdown as at 31/12/2018 (%)
| Healthcare equipment | 25.9 |
| Pharmaceuticals | 23.7 |
| Biotechnology | 10.2 |
| Managed healthcare | 8.4 |
| Life sciences tools & services | 8.0 |
| Healthcare facilities | 4.2 |
| Healthcare supplies | 2.4 |
| Healthcare services | 1.2 |
| Application software | 0.8 |
| Healthcare technology | 0.2 |
| Cash | 14.9 |
Source: Polar Capital
