By the time Covid-19 is done with us, the global economic landscape will have changed almost beyond recognition. The high street is being decimated as BigTech cleans up, and biotech innovators are leading the charge against coronavirus. Buying biotechnology funds therefore seems like an obvious strategy in the short term: leading companies in the US, China and Europe are all vying to develop vaccines and therapeutics. But in the longer term, exposure to biotechnology and healthcare companies can also be justified. We are fast depleting the world’s natural resources and we desperately need to reduce our dependency on fossil fuels while feeding a growing population as climate change wreaks havoc on the agricultural sector: the solution to these and many of the other challenges with which future generations will have to grapple lies in biotechnology.
There are, however, caveats when it comes to investing in biotech companies engaged in developing coronavirus treatments. Very often, millions of dollars are spent in laboratories with very little results: for various reasons, products fail to come to fruition and so end up being unprofitable. In short, the odds of picking a runaway winner are low.
Secondly, while the situation may appear to be under control in Europe, the pandemic is only just getting started in other regions of the world. What this means is that stocks in many biotech companies are still vastly overpriced because of all the “virus hype”. So there is a risk of buying after a significant amount of the potential has already been priced in.
Finally, it will be at least a year until any vaccine becomes widely available. By that time, it is just conceivable that so many people will have contracted the disease that demand for vaccines and therapeutics will have plummeted.
Nevertheless, the next few weeks or months could well see developments on the Covid-19 front that would help investors significantly. Indeed, any progress could bring substantial relief to an anxiety-stricken market and to the wider public, helping to reverse much of the fear and panic that has characterised the investment landscape for the past three months or so.
There is another – less obvious – silver lining for biotech investors. For many politicians, biotech companies are tarred with the same brush as pharmaceutical companies: they are “evil”, because they charge too much for the drugs they develop. But if one or several biotech companies were to rescue the world from Covid-19, it would be considerably harder for politicians to rail against them.
When considering themes or strategies for portfolios outside of IQ’s normal asset allocation, we tend to look at four key factors: (i) technology, (ii) the consumer, who spearheads the bulk of GDP enhancement, (iii) renewable, clean energy and (iv) healthcare and biotechnology. Since the solutions to many of the world’s future challenges will be developed by healthcare and biotechnology companies, these two are particularly important.
Given that we are all living longer, wealth managers have to devise solutions and build portfolios to support clients’ need for investment growth. Biotech can play a key role in this.
It’s always a good idea to have a good mix of both major global healthcare companies and smaller, innovative ones. Since many of these smaller companies get taken over by larger ones through mergers and acquisitions (which is profitable for shareholders and investors), there is value in capturing both.
Today, IQ accesses these markets through “passives”– Exchange Traded Funds (or ETFs) that involve a collection of securities that track an underlying index. These low-cost products are designed and put together by experts to enable wealth managers to access specific sectors – such as biotechnology, healthcare and agriculture – all in one inexpensive parcel. IQ purchases more ETFs now than it did a few years ago – because of their value, and because they capture many high-potential companies.
IQ accesses these market through global asset managers– such as Vanguard or BlackRock. But new entrants to the UK market – such as New York-based exchange-traded fund and exchange-traded product sponsor and asset manager WisdomTree Investments – are better suited to accessing biotechnology or specialist ETFs.
The most important risk to consider when buying into biotech or healthcare is regulation. Access to healthcare is also heavily politicised: a Biden administration would not have the same approach to healthcare providers as the current Trump administration does. And although the idea is obviously to grant everybody access to the best drugs, some of the very expensive high-profile cancer drugs, for example, are not available to everyone.
It is important to acknowledge the distinction between pharma companies – which create medicines from chemicals and synthetic processes – and biotechnology companies which use living systems and organisms to develop or make products. Their practices can give rise to numerous ethical considerations when measuring the sustainability and social impact of investments in a company.
Indeed, biotech companies are now having to factor in ethical issues in the boardroom, as well as in the laboratory. Increasingly, they find themselves up against the same kinds of business ethics conundrums as other companies – while they undertake cutting-edge work with emerging technologies and endure ever-changing public opinion. In other words, until recently biotech was governed by healthcare ethics. But increasingly, it will find itself bound by corporate ethics.
We believe that growth portfolios should consider having an allocation to healthcare, and to biotech in particular. You should bear in mind, however, that such an approach could add volatility and risk to your investment strategy – because of the significant amount of research involved and the relatively low probability of this research yielding anything.
Nevertheless, in view of the current health crisis and people’s increasing longevity, we believe that it will continue to be essential to thematic investing over the next 20 to 30 years.
Furthermore, with the emergence of disruptive technologies, new entrants are now able to access the market, providing exciting opportunities for greater exposure in our portfolios to a wider range of asset classes.