Colonial First State is bullish on the healthcare and biotechnology sectors in the belief that these...
Colonial First State is bullish on the healthcare and biotechnology sectors in the belief that these parts of the market will be driven by volume growth as Western populations get older.
Dr Joe Anderson, the lead manager of the group's Global Health & Bio-Technology fund, believes that health and biotechnology will be the next global investment revolution.
He said: "The point of these sectors is that the drivers of growth are so unassailable. It is all about volume growth, it is not about price growth, so the politicians cannot do anything.
"They can cut prices, but that is not where the growth is coming from and as far as I know politicians have not found a way, yet, of stopping people getting old.
"The point is this is volume driven and it is this that is going to give you long-term growth. In a portfolio that is dominated by pharmaceuticals and medical device companies, the earnings are very defensive and stable."
Anderson said that the US spends around $1.5 trillion dollars, or 15% of GDP on healthcare and said that the way these costs can be contained is for more drugs to be bought.
For example, before 1974, there was no treatment for ulcers other than surgery. Anderson said that ulcer surgery costs $28,000 but SmithKline Beecham and Glaxo invented treatments that reduced the cost of treating ulcers to $900.
Anderson said: "So there is a powerful economic argument that drug companies can make to government as to why they should buy their products. In an era of recession, in an era of cost cutting you want to buy drugs.
"I think the hype for genomics is justified but should be tempered with a bit of reality: patients seeing treatments coming out of genetic medicine is five to 10 years away at the earliest. But the investment opportunities are there today for the companies trying to get at it. It is exciting commercially because it takes a big drug company, like Glaxo or SmithKline about $500m to develop just one drug, so the barriers to entry in the industry are very, very high.
"That is until the bio-tech companies came along, because the bio-tech companies have promised to reduce the cost of developing those drugs, because they are going to find you the genes for diabetes and once you have got the gene for diabetes then you can go straight after developing a drug for it."
Colonial's Global Health & Bio-Technology fund is overweight in medical technology and medical services. The fund has 43 holdings with 50% being in the pharmaceuticals sector.
The fund's bio-tech holdings tend to be 1% or 2% positions, Anderson said, noting that they are more volatile and the holdings need to be fairly small to control risk.
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