We’ve had a glorious start to the summer here in the Channel Islands: the wine is chilling in the fridge, out-of-offices are popping into the inbox and just about everyone seems to be in the sea. While things have cooled off a bit locally, the temperature in the markets – particularly in the healthcare sector – has remained unpredictable.
Healthcare, a longstanding staple of our thematic portfolios, has faced a tough first half of the year. Political noise around US healthcare reform — a perennially promised but rarely delivered topic — has grown louder again. It’s hard to argue with the idea that the system needs improvement: despite having some of the highest per capita healthcare spending globally, US health outcomes often lag those of comparable countries.
Although this is a complex multi-faceted issue that involves more than just drug companies, the key question for healthcare investors today is whether the Trump administration will succeed in effecting change where so many others have failed. As we saw in Iran, Trump is willing to make decisions that other presidents have shied away from. With so much uncertainty, investors are right to feel jittery, especially in the more volatile corners of the market like biotech and further down the market cap spectrum.
We began the year with two funds in the healthcare space; one is a core healthcare fund, providing exposure to the major large-cap pharma players, and the other is targeting higher returns through the more volatile biotechnology stocks.
While we continue to believe in the long-term potential of biotech, current headwinds – including volatile interest rates, weak sentiment, and unpredictable policy – suggest that this part of the market could remain out in the cold for some time.
We have therefore stepped out of the biotech fast lane and are happy to wait until M&A activity and investor confidence return. Having conviction doesn’t always mean doubling down on volatility, sometimes it means choosing to reallocate risk elsewhere. At this point in the cycle, we believe capital can be put to better use elsewhere. It’s easy to forget that not owning something is still an active decision.
For now, we think the better expression of our healthcare conviction lies in the unloved, unexciting and frankly underappreciated corner of large-cap pharma. It may lack the glamour of biotech breakthroughs, but it offers solid fundamentals and defensive characteristics in uncertain times.
My personal focus is the spicier end of the risk spectrum so it was with a heavy heart that we exited our biotech holding, but we will keep an eye on the space. At some point, just like the Guernsey weather, things will start to heat up again soon.
The long-term tailwinds are all still at play – ageing populations, rising middle classes in emerging markets particularly, growing burden of chronic disease and the urgent need for a more efficient, accessible and affordable healthcare system globally. These aren't just passing trends, they are structural and powerful.
If you’re investing thematically, healthcare deserves a seat at the table – maybe the one next to the cardiologist?
