Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. INDUSTRY VOICES
September 09, 2019 10:00 AM

Commentary: Why investors are prioritizing health care in a big way

Jonathan Caplis
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Jonathan Caplis
    Jonathan Caplis

    Across asset classes and strategies, health care has become a highly prized sector. The industry's public stocks strongly contributed to this year's record-high market closes, and health-care companies have outpaced technology firms as private capital firms' targets based on deal flow. Within the hedge fund industry, health care has driven outsized results for specialized and dedicated managers.

    At a high level, opportunities in health care are largely driven by new product innovation, regulatory and scientific complexity, and strong demographic trends. The sector is also catalyst-rich and event-driven in nature — including a large and growing number of clinical trials, drug approvals, and mergers and acquisitions — which makes health care less correlated to the overall market.

    Innovation and disruption in the sector is unabated, and new drug approvals have increased as costs come down. The number of clinical trials has grown exponentially to 314,644 as of August, from 1,255 in 2000. M&A activity in the pharmaceuticals and biotech industries is widespread as "big pharma" companies acquire smaller biotech firms; in particular, within the fields of oncology and immuno-oncology.

    Health care also continues to be a growing part of the U.S. economy. Health expenditure as a percentage of U.S. gross domestic product grew to 17.1% in 2018, from 12.5% in 2000. Health care also tops other industries in the initial public offering market. According to IPO research firm Renaissance Capital, the health-care sector has had the most IPOs by industry every year from 2014 to 2018, continuing apace through August. In 2018 alone, health care represented 40% of all IPOs and $9 billion in proceeds.

    A growing number of health-care hedge funds are also taking advantage of private investment opportunities, either through co-investments, side pockets or separate product offerings. Many times, private investments are significantly increasing returns as funds can get involved at an early stage and leverage synergies between public and private research. Additionally, most hedge fund firms employ Ph.D.s and professionals from the medical industry, who help in analyzing the more nuanced and technical aspects of investments.

    All of this activity is correlated with outperformance compared to other peer groups. We compared performance among our 40 strategy indexes containing more than 1,150 hedge funds, and health care has been the best performing peer group on a 10-, five-, three- and two-year rolling basis (as of May). Additionally, from an alpha perspective, health care generated the highest alpha of any strategy over both the last 24 months and five years, relative to our proprietary risk models.

    Investing in health care is not just a beta play. A significant amount of the return is alpha-based, meaning that stock selection plays a vital role in determining hedge fund performance. Stock picking is especially important in the health-care sector given all the volatility and dispersion in the sector.

    Breaking it down by subsector, there is also substantial dispersion within health care, creating a good environment for both long and short opportunities. For example, during the first half of the year, the best performing S&P 500 health-care GICS subsector is health-care technology, up 39.8%, while the worst performing subsector, health-care services, is down -10%. In 2018, the Health Care Facilities GICS index was the top performer at 30.5% while the Health Care Technology GICS index was the worst performer at -22.2%.

    Over the last five years, nine of the 10 S&P health-care subsectors generated a positive CAGR with managed health care at the top with 21% and health-care distributors at the bottom with -3%. The S&P 500 Health Care index itself has a five-year CAGR of 8.8%, compared to 8.5% for the S&P 500.

    However, the S&P indexes do not paint the full picture of performance in the sector. Notably, biotechnology stocks fared much better when looking at the Russell 2000 health-care subsector indexes, which are more small-cap oriented. The Russell 2000 Biotechnology index is up 24.2% (as of June 30) and has a 10.8% five-year CAGR. In comparison, the S&P Biotechnology GICS index is down -2.1% through June 30 and has a 3.1% five-year CAGR. The Russell 2000 Biotechnology index is more representative of actual hedge fund exposure and thus performance. From this standpoint, it is clear that small-cap biotech is additive to a health-care investor's portfolio.

    Of course, investors should always assess investment strategies within the context of the macro environment. Given the importance of regulation within the health-care industry, as well as its high-profile role as a talking point in political discussions, the result of next year's federal elections could lead to regulatory changes in this industry.

    Ultimately, as the data clearly demonstrates, health care generates consistent and compelling performance across numerous metrics. The backdrop for those opportunities has only increased over time.

    I believe that long/short funds in health care have room to run.

    Jonathan Caplis is CEO of PivotalPath Inc., New York. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.

    Related Articles
    Institutional investors drawn to health-care sector
    Investing to cure health-care woes
    TPG in talks to combine Abraaj's health-care assets in Rise Fund
    Recommended for You
    Hans Stoter
    Commentary: Asset managers need to work together to effect real change
    Cara Lafond
    Commentary: Allocating to hybrid strategies is a multiple-choice decision
    Paul Rissman
    Commentary: Texas pension participants deserve better than political interference
    SPDR® ETF’s New Approach to Bond Liquidity
    Sponsored Content: SPDR® ETF’s New Approach to Bond Liquidity

    Reader Poll

    June 6, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Nearing the finish line: Ideas on end-state investing for corporate DB plans
    The Meaning of "Portfolio Intelligence"
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Crossroads: Politics, Inflation, & Bonds
    Is there a mid-cap gap in your DC plan?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    June 20, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit