How Healthcare Funds Performed in the Covid-19 Crisis

Healthcare funds invest in a range of different companies including those which provide medical services and insurance, those that manufacture medical equipment, and those which develop new drugs and treatments for diseases. 

Healthcare is typically considered to be a defensive sector, because it is an area which governments and individuals spend on regardless of the economic environment. However, earlier-stage biotech companies, testing new novel treatments are often more vulnerable when spending on research and development dries up and can see their value plummet if clinical testing doesn't go well. 

This backdrop only intensifies in the middle of a global pandemic. Morningstar analyst Karen Anderson says: "Medical supplies (preventive products like masks and soaps and commodity hospital supplies like saline solutions) could see increased short-term demand. However, we don't assume any significant long-term financial impact from the outbreak."

The challenge then, for a fund manager is to back the right businesses. We have looked at the performance of funds in the Morningstar Healthcare category to see how they have fared both in recent weeks and over hte longer term. 

The three-star rated BNP Paribas Health Care Innovators is the top performer in its category, down 5.1% year to date, beating the average return in the category by 2.3 percentage points. 

 Best Performing Healthcare Funds

Source: Morningstar Direct. March 26, 2020

There are 41 stocks in the fund's portfolio and a delve into this shows that an investment in one in particular has significantly boosted returns. Teladoc Health (TDOC) is up an eyewatering 75.9% year to date. The company offers virtual healthcare services, allowing people to access healthcare around the world sitting comfortably in their house.

This is particularly appealing at a time when many households are on lockdown; the service means individuals can still access a doctor without travelling, thus eliminating the risk of catching and spreading the coronavirus. Indeed, Teledoc recorded a 50% surge in visits in March, a clear sign that telemedicine is quickly growing in popularity.  

Two other companies in the portfolio also saw a double-digit share price rise in the past couple of months: Lonza (LONN) and Dexcom (DXCM) are up 10.6% and 13.4% respectively year to date. Lonza is a leading supplier of active pharmaceutical ingredients, biopharmaceuticals and research products to the pharmaceutical, healthcare and life-science industries. While Dexcom is specialised in glucose monitoring for people with diabetes.

The four-star rated JPM Global Healthcare is the second best performing fund in the category year to date and also invests in Teledoc, its best performing holding of late. Two other major contributors to its performance are Twist Bioscience (TWST) and iRhythm Technologies (IRTC). iRhythm is a digital healthcare business that redefines the way cardiac arrhythmias are clinically diagnosed, using cloud-based data analytics and machine-learning capabilities. Twist Bioscience is a silicon-based DNA synthesis platform, which is also helping fighting the Coronavirus.

The Neutral-Rated BGF World Healthscience occupies the third position, having a good stake in Teledoc too. Another company in the portfolio that has performed very well this year is Acceleron Pharma, whose shares soared 49% after the biotech drugmaker said its hypertension drug hit key goals in a mid-stage clinical trial. The company also announced that a phase two clinical trial had showed its drug led to a significant reduction in pulmonary vascular resistance in patients with pulmonary arterial hypertension.

Worst Performing Healthcare Funds

Source: Morningstar Direct. March 26, 2020

At the other end of the spectrum is Polar Capital Healthcare Opportunities, down 17.3% year to date. Quotient Technology (QTNT), Zimmer Biomet (ZBH) and HCA Healthcare (HCA) were its main detractors from its performance, down 64.5%, 35.3% and 37.1% respectively.

Tech firm Quotient is a leading digital promotions, media, and analytics company that delivers digital advertisements and coupons to millions of consumers and its shares recently fell after it reported weak company results. 

Zimmer, meanwhile, is a Warsaw-based company that makes solutions that support orthopaedic surgeons and clinicians in alleviating pain and improving the quality of life for people around the world. The share price was hit because investors alleged that throughout 2016 the company issued false or misleading financial projections it knew would be impossible to achieve because of known problems at one of its largest manufacturing centres.

HCA Healthcare is a leading private healthcare company in London and Manchester. Due to the quick increment in coronavirus cases in these areas, investors are afraid the number of cases could overwhelm its hospitals in the coming weeks.

While the disparity between the best and worst performing funds in the sector over recent weeks is stark, it is important to keep an eye to the long-term. A fund's five-year annualised returns may give a greater insight into how it will fare over the course of an economic cycle, rather than in the maelstrom of a set of very specific and extreme circumstances.

Morningstar's Anderson adds: "Unless Covid-19 has staying power, most of these [increased] sales tend to reverse in the following year, limiting the impact of any valuation effect. Additionally, most of the supplies used to prevent the spread of viruses tend to be commodity-like products, so there is more limited ability for firms to retain excess profits, especially over the long term."