We’ve made no secret of our overweight allocation to health care compared to the S&P 500. How should investors react when the sector is slumping, as it has been of late? Chairman Dan Wiener discussed the state of the health care industry and our approach to it in our recent webinar,* Inflation, Inoculation and Infrastructure: Defining the New Normal.
Please enjoy the excerpt below and click here for the full webinar replay to hear more.
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When we use the standard market definitions, health care is about 13% of the stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market size or market cap, but when we look at the economy, it’s closer to 20% of overall economic activity, or GDP, and it’s a very broad industry. We’re talking about biotechnology, pharmaceuticals, health care providers, insurers and device manufacturers. Think artificial joints, MRI machines, what have you. It is a sector that goes in and out of favor in the stock market.
Lately, what’s happened with the health care sector? The last four and a half years or so, health care has simply matched the stock market. If you go over the last six and a half years, it’s underperformed by a bit more than 30%. But if you look over the last 10 years? It’s outperformed. Health care has outperformed by a bit more than 30%. In the longer-term, 26 years, the health care sector has outperformed the overall stock market by about 45%, and that’s pretty impressive. (I’m using 26 years, by the way, because this is when a diversified, viable index of the market was readily available, and you could index it by an index fund of the health care sector.)
Now, let’s talk about the pandemic and the response. The vaccines themselves are not going to make companies rich and that may be part of why we haven’t seen the health care sector outperforming lately. It’s what’s happening in the labs today that really matters. I was on a call the other day with a terrific health care manager, talking about oncology and immuno-oncology as areas where there are discoveries and therapies being developed. The smart portfolio managers are looking for the drugs of the future. They’re looking at what’s going on in the labs. They understand the science and that is why we think an active manager can outperform.
Put that on top of valuations. Right now, the health care industry as a whole is at very low valuations relative to the S&P 500, if you look at forward price/earnings multiples. This is what the price of the health care stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. are versus the expectations for earnings. It is the second cheapest sector in the market after financial stocks on a forward P/E basis, and I would note that P/Es on financials aren’t always a great metric for measuring them. Health care is relatively cheap, historically, and cheap compared to the rest of the market. We are very comfortable sticking with that overweight to the sector in your portfolios, particularly right now.
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Click here for a replay of Inflation, Inoculation and Infrastructure: Defining the New Normal. Please contact us at (800) 492-6868 to learn more about comprehensive wealth management solutions.
*Webinar recorded after the market closed on Wednesday, April 28, 2021.
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