Harvest Advisor Webinar Summary
Healthcare Sector Fall Checkup
Healthcare has been at the forefront of the daily news nearly two years as the pandemic became a global phenomenon and all eyes focused on the race by drug companies to find a vaccine solution.
But beyond this specific problem, healthcare has long-term energizers and a strong outlook. For investors, these positive forces add up to an investment opportunity. Harvest Portfolios Group captures this potential through its Harvest Healthcare Leaders Income ETF (HHL:TSX), which is the largest healthcare ETF in Canada.
This was the message delivered by Paul MacDonald, Chief Investment Officer of Harvest, in a recent advisor webinar entitled “Fall Update Healthcare Sector”.
“Valuations are attractive, growth is visible, the sector has shown leadership and we believe large cap companies have strong tailwinds,” Mr. MacDonald said. He believes that US political risks are muted and sentiment towards big pharma has changed for the better as the drug companies came together to tackle Covid-19.
Mr. MacDonald said Canadians tend to look south for investments in this sector since many of the largest global companies are based in the US. These multinationals anchor the Harvest Healthcare Leaders Income ETF. The ETF is diversified among drug developers and biotech companies, companies making medical equipment and consumable supplies, healthcare providers and hospital providers.
At the end of September 2021, about 40% of the holdings are pharmaceuticals including the vaccine makers Pfizer Corp. and Astra Zeneca plc. Biotech is about 15%, with 24% in equipment, supplies and testing. This group includes Medtronic Inc., Abbott Laboratories Co. and Thermo Fisher Inc. About 20% are in healthcare providers and facilities.
The ETF uses Harvest’s covered call strategy which generates extra monthly income. The portfolio is actively managed and rebalanced quarterly.
Mr. MacDonald said three powerful energizers are: aging populations in the developed world, rising healthcare spending in developing markets and technological innovation which is creating new treatments.
The over 60s are a rapidly growing demographic in North America and Europe. In North America, 23% are over 60 which will rise to 28.5% in 2050. In Europe, the comparable numbers are 26% and 35%. In Asia, the over 60s are seen almost doubling from 13% to 24% in 2050.
“This is important because as we age, we spend exponentially more on healthcare,” Mr. MacDonald said.
In the US, the 45-to-64 group spends an average US $10,200 annually on healthcare services. The 65 and over group spends almost double that.
“So, a significantly growing portion of the populations is spending significantly more in this area,” he said.
Meanwhile in developing nations, more discretionary income means more spending. In the last 20 years, healthcare spending in China and India has grown by about 15% annually.
Mr. MacDonald highlighted three companies in the Harvest ETF that illustrate the sector’s innovative features.
Stryker Corp.: This medical device maker has a market capitalization US $89 billion. It makes such things as stretchers, portable x-ray machines and endoscopy equipment. It also makes orthopedic devices for hip and knee surgery and neuro-technology and spinal devices. It is a leader in surgical robotic.
“When you walk into an operating room, the bulk of the equipment is theirs,” Mr. MacDonald said.
Regeneron Pharmaceuticals Inc.: This biotechnology company has a market capitalization of US $68 billion and is a leader in immunology, oncology, infectious and rare diseases. Its research and development efforts include antibodies, genome editing and gene therapy.
UnitedHealth Group: This health care products and healthcare insurance company has a market capitalization of US$383 billion. It is the 5th largest American company by revenue in the Fortune 500 rankings and owns facilities, physician networks and manages government Medicaid and Medicare programs.
Mr. MacDonald said current valuations are attractive. While the average price-to-earnings ratio (PE) of the S&P 500 is 21.5, it is 17.7 for healthcare. This is even though healthcare is a superior good which means people spend on its services in all conditions.
When it comes to politics and drug pricing, the landscape is “divided, complex and with a lot of moving parts.” While drug pricing captures headlines it is only 10% of spending pie. He does not see major pricing reforms on the horizon.
In summing up, he said: “We are well-diversified across the sub-sectors. Our covered call strategy enhances our monthly cash flow. The sector has attractive valuations and attractive growth profile. I see lots of opportunity and great value.”
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For more on Harvest Equity Income ETFs click here.
By Paul MacDonald, CFA
Chief Investment Officer