These two statements about investing are both true:
- Being too early is better than being too late
- Being very, very, very early is the same as being wrong
The perfect time to invest in any asset is the very moment before the price rockets. This is impossible of course, and timing is always difficult, but the trick is finding a good entry point, being patient and being prepared to change course if necessary.
In our last monthly performance update, we highlighted a couple of new investments we have made this year that started to perform well almost straight away. This doesn’t always happen though. In March we initiated a new position in a Global Healthcare fund, and performance has been… well, what do the kids say… a bit ‘meh’. The healthcare sector has lagged the global equity index ever since and we were starting to worry this was a bad call, BUT, in the last month the sector has finally started to show signs of life.
The healthcare sector has struggled against the broader market ever since the start of 2023, and this trend has continued so far this year, to the extent that in Q2 the healthcare sector in the US produced the worst relative return versus the S&P 500 of any previous quarter in history. The negative investment sentiment has come from many fronts, but the main reasons are:
- Concerns of US government spending cuts on healthcare (remember DOGE?)
- The appointment of RFK Jnr as Health Secretary, who has a history of controversial views on healthcare
- Worries about tariffs being applied to pharmaceuticals
- Investors being more interested in high growth tech stocks and crypto, rather than defensive sectors such as healthcare
Although uncertainty continues to hang over the sector, much of this concern is already priced in. The sector’s relative valuation compared to the S&P 500 is at an historic low, a level that has only been reached three times in the past 35 years.
The sector still has key long-term growth drivers such as an aging global population, biotechnology, MedTech, life sciences, and access and affordability to medicine. These drivers are still intact, and the healthcare industry remains highly innovative. Also, increasing wealth in emerging markets is leading to demand for higher-quality and better healthcare provision. At the same time, government expenditure on healthcare is set to increase from current low levels.
At Five Horizons we aim to identify long term investment themes at reasonable prices. Once a theme has been identified we then decide which is the best way to get access to it. I can’t think of many industries as complex as the healthcare industry (Don’t ask me to explain the below graphic). If ever there was a sector which required specialist knowledge, this is it. Which is why we invested in an active fund where the management team understood the intricacies of the market.
Source: Polar Capital
It’s too early to know whether investor sentiment has definitively changed, but perhaps the clouds are now shifting for the healthcare sector, and the underperformance in 2023 and 2024 may have provided us with an attractive entry point. Just what the doctor ordered.
