Why GAM is investing in EM healthcare

GAM is investing in a new emerging market healthcare fund to make the most of developing consumption at better value and less volatility.

GAM International Management portfolio manager Kier Boley says the firm will steadily increase exposure the Sectoral Emerging Markets Healthcare fund as part of its wider emerging market allocation.

“Within emerging markets we’re always looking at what is a unique source of alpha,” he says.

Sectoral Asset Management is a Canadian healthcare investment specialist that has run developed market funds for 14 years and several years ago branched into emerging markets as well.

An EM-focused strategy set up for an institutional client worked well and was subsequently launched as a fund in March.

Sectoral business development manager Wayne Kilbourne says the $15m fund is expected to receive another $14m from institutional investors in the coming months.

At the index level, emerging markets are usually dominated by banking and resources companies, which are disproportionately cyclical, Boley explains.

“The place that has been the most sustainable has been access to the domestic consumption story. The first way that was played was through the luxury goods brands, especially in China, but that’s expensive now on a multiples basis.”

Healthcare, meanwhile, is a top priority for any middle class. With that section of society burgeoning in the developing world, it can expect great growth, he says.

It is also likely to be less vulnerable to the bumps along the road, he says.

Sectoral says the strategy’s volatility over the past three years was 16 per cent compared to the MSCI Emerging Markets index’s 19 per cent.

In 2010, the average annual per capita healthcare spend in China was $200, while India’s was just $19, according to OECD data.

Most developed nations spend between $4,000 and $5,000 each year, while in the US it is $8,000.

“The first thing they will focus on is healthcare for themselves and their families so I think it’s much less cyclical and a lot less volatile than other areas of emerging market exposure.”

There are few emerging market healthcare specialist managers and many are long-short hedge funds, he says.

Of the one or two long-only specialists, Sectoral is the only one with a significant track record, he adds.

Sectoral head of research Marc-André Marcotte says the fund invests in a portfolio of between 25 and 35 local companies, mostly hospitals, as well as generics companies that also offer some export growth to developed markets as well.

Contract research companies and medical equipment companies are also fodder for the fund.

Most EM healthcare markets are fragmented, which means there is a chance of consolidation and the efficiencies and deals that brings, he says.

At present, India supplies 40 per cent of the generic drugs consumed in the US, Marcotte says.

Sectoral believes the fund could be up to $1bn safely, given the $500bn to $600bn market. Growth is rapid as well, with original estimates for the strategy setting a ceiling of $500m.

Sectoral has been touring Europe to drum up investment in the new fund.