Healthcare sector offers investment opportunity: American Century

Even as healthcare companies showed strong return through 2020, the impacts of the COVID-19 pandemic was not a rising tide for all healthcare sector corporate boats, notes American Century Investments.

American Century Investments' American Century Health Care Impact Equity fund, managed by Michael Li, seeks quality stocks by incorporating acceleration, relative strength, and valuation, and currently has US$1.66 billion as of June 2020. It was launched in November 2018, and has total assets of US$1.68 billion as of the end of December 2020. Since inception, it has returned 17.38% net of fees and 21.73% in the last year.

Zurich Financial Services Australia offers a local version of the strategy, the Healthcare Impact Fund, which is managed by American Century Investments

The strategy is linked to Sustainable Development Goal 3 - Good Health and Wellbeing and focuses on several specific parts of the healthcare and medical sector.

"Telehealth businesses skyrocketed in value through the pandemic as they provided care to patients through 2020," Li said. "The other area of strong growth was around the tremendous effort to find vaccines and therapeutics. As a result of that, there's a huge demand for related manufacturing and a demand for the products and services for a lot of the companies that we own in this space - companies that provide reagents for testing kit manufacturers, for example."

The third area of strong performance is related to COVID-10 testing, Li said.

"Some companies have innovated quickly and introduced quick tests or really accurate tests," he said. Those companies really benefitted. Therapeutics benefitted as well and had strong demand through this period."

On the flip side, companies that provide medical procedure services had impaired demand in 2020, particularly in the first half of the year, Li added.

"Hospitals were forced to make tough decisions where they wanted to allocate resources," Li said. "Clearly, the prioritisation was towards COVID patients in intensive care units, and that need skyrocketed. Other medical procedures got squeezed out. In a way, it impacted the regular medical activities."

These activities normalised during the north American summer, as COVID-19 cases slowed down in major North American and European markets.

"Hospitals were able to free up beds for regular procedures. During that period, we saw recovery in those companies performances. But in the fall and with the return of cold weather, there was another spike in viral cases, and as a result, procedure volume fell again. Hospitals were cramped with COVID0-19 cases, and they can't allocate enough capacity towards traditional procedures.

"Our thinking is that as we get more vaccination, we should start to see a normalisation of returning to more normal levels of procedures in hospitals and as people get vaccinated, they should feel more comfortable to get vaccinated. This will play out this year."

Looking to the long-term outlook for the healthcare sector, one positive aspect that Li highlighted was the innovation of companies in the sector, which bodes well over the longer horizon.

"Innovation in healthcare - look at how quickly companies were able to sequence the DNA of the virus, and how quickly they developed vaccines or therapeutics and how quickly they moved them into testing and distribution," Li. "It's unheard of. If you think about past pandemics, this is so much faster. It's a true reflection of how much innovation is going on, and how much we can do collectively as an industry."

With governments recognising the public health and national security risks of pandemics as a potential regular feature of life in future, this will also bring new funding into the sector as well for R&D.

"As companies or institutions get more funding get for more basic research and better understand the basics about various diseases, that goes to one of the underlying themes of how we invest," Li said. "There are so many unmet medical needs out there. That will take multiple years, multiple decades of efforts for us to overcome."

Li noted the potential is "huge", pointing to other advances outside of viral pandemics, such as therapeutics for dementia. Li also said that he expected to see new private capital come into healthcare research and development as well.

"A lot of private capital is coming in to really encourage the early endeavours of scientific, experimental research, and that will help as well," he said.

Read more: American Century InvestmentsMichael LiAmerican Century Health Care Impact EquityHealthcare Impact FundZurich Financial Services Australia
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