A long-term prescription to consider for your investment portfolio
With the healthcare sector delivering attractive returns to investors over the last decade, J.P. Morgan Asset Management looks at reasons for the strength of global healthcare, and explains why healthcare stocks continue to provide attractive investment opportunities for long-term investors.
A growing elderly population
Healthcare is a significant part of the global economy accounting for more than 10% of GDP across many developed countries and according to J.P. Morgan Asset Management, the sector presents a diverse range of compelling investment opportunities as ageing populations and longer life expectancy create rising demand for healthcare products and services. By 2025, nearly 30% of Europeans and 25% of Americans will be over the age of 60. Globally, the fastest growing population segment is the over 60s, with the number of people in this age group expected to almost triple to two billion by 2050.
Scott Braunstein, portfolio manager of the JPM Global Healthcare Fund comments: "The healthcare sector is well placed for further impressive growth, supported by ageing populations across many countries and growing healthcare spending in the emerging markets. We believe it may therefore be time for long-term investors to consider adding healthcare exposure to their portfolios.
"There are diverse investment opportunities - from defensive large cap pharmaceutical stocks offering solid dividend yields and expanding their businesses into emerging markets, through to the explosive growth prospects offered by biotech companies developing new drugs that could make a real difference to the lives of millions of patients."
Pharmaceuticals
Pharmaceutical stocks can offer safety in uncertain markets thanks to good dividends, strong balance sheets and relatively stable businesses, although pipelines remain challenged. Today, many large pharmaceutical companies continue to face a challenging outlook as patents expire for blockbuster drugs with little sign of replacements on the horizon. Additionally, uncertainty over US healthcare reform and government budgetary pressures remain an overhang, although these worries could ease after the November 2012 elections. In Europe, where governments are the key payers, market access remains difficult. Public spending cuts are putting pressure on pricing in the healthcare sector and accelerating a move towards generic drugs.
Explosive growth opportunities in biotech
The biotech sector has performed strongly over the last decade, significantly outperforming the broader MSCI World Healthcare and MSCI World indices. The sector showed particular resiliency during the 2008 downturn in equity markets. Global expansion and growth opportunities, high operating leverage for biotech companies with small sales forces and low cost bases as well as M&A have all contributed to the strong performance of the sector.
Scott Braunstein continued: "Over the longer term, we believe that product pipelines and earnings growth potential, which have largely been ignored over the past few years, will once again move to the forefront of investors' minds when considering the pharmaceuticals sector. We continue to be overweight in the biotech space as we expect more pipeline success and believe that the valuations of the stocks we own. Against this backdrop, the JPMorgan Funds - Global Healthcare Fund has around 45% invested in pharmaceuticals and nearly 30% of the portfolio is invested in biotech stocks.
"Selectivity is the key to identifying the winners in this sector. At J.P. Morgan Asset Management we have a team of highly experienced, dedicated healthcare specialists with, on average, 15 years' industry experience. Experience and expertise is crucial to fully understanding the investment potential and the risks associated with this often complex sector. We look to invest across the entire healthcare sector in companies that meet the following four criteria: Science forms the foundation of all investment decisions; attractive market opportunities via new therapeutics to serve large and changing medical needs; Intellectual property - solid patents and global rights can yield strong returns for many years and finally, a strong management team is key in delivering product to market."