Baring Asset Management is promoting a new multi-sector fund in Hong Kong and Japan this week, and is putting particular focus on its health care sector offering. Anne Underhill, senior vice president of North American equities, is BAM’s health care guru in town from Boston – her first visit to Hong Kong. She’s talking to BAM investors about how health care is, and is not, going to be as big as tech was in 1999.
The tricky thing about health care stocks is that you need a much longer-term outlook. Although “biotech” has been around for two decades, and BAM has had a health care sector team for six years, it’s really taken off with the completion of the mapping of the human genome. This will allow researchers to introduce new drugs under the protection of patents. Fund managers see huge profits down the line. The sector is also benefiting from demographics – greying populations in the developed world, young populations demanding better health care in the developing world.
Okay, we’ve heard this one before. My Ariba and PCCW stock is still in the tank.
Underhill acknowledges health care stocks have the potential to flame out like internet ones. She notes volatility in the sector has doubled over the past few years, and announcements such as the Genome Project cause stock spikes. “People got burned in tech, but they still want to be more sector-focused,” she says.
The tech and health care sectors are quite differently structured, Underhill notes. First the demographic scene doesn’t switch on any particular year – it’s a slow, ongoing trend. Second, no one expects the benefits of new drugs hitting the market to appear for 10 years, so investors must be patient.
“We looked at what happened with internet stocks. Companies like AOL and Yahoo! had a lot of ideas, but it was tough to call the winners. You could, however, buy those companies such as Cisco that provided the infrastructure. So when genomics gained steam, what we learned from our internet experience was don’t buy the drug companies, buy those companies that speed up the lab work or enable others to do the research. It takes five to 10 years for a new drug to emerge so we can’t guess who wins, but we know all drug companies use this technology ... these are profitable companies.”
Despite the notion that this is supposed to be a long-term option, Underhill recognizes the sector is rife with hot money, a lot of it coming from former dotcom investors. Therefore BAM has just introduced a multi-sector fund – it rolled out in the UK on 12 February – to keep investors from hopping from one sector to another. “We combine sectors to reduce volatility but get a better return,” she says.
Where’s Asia?
With health care in particular, Asia is barely on BAM’s map as a destination for capital. Japan is the second largest market for drugs after the US, but the structure of the industry makes it difficult for Japanese firms to conduct research and development (R&D). New rules allowing the use of foreign clinical results and requiring more disclosure in domestic tests mean only Japanese companies with a global R&D presence can compete. And the tangled health care system in Japan, with its elderly population, leads to the government continually slashing drug prices. Local companies aren’t able to keep up with American or European competitors, so Japan is a rather small allocation.
The other Asian country the fund has exposure to is India, but again the local dynamics keep it small. Indian pharmaceutical companies excel at reverse engineering others’ work, and they have become very profitable at selling copies of drugs developed in the US or Europe. BAM is an investor, but Underhill is concerned about the nature of this business, which essentially undermines the patent system that makes her Western investments so alluring. She doesn’t see India becoming a major player until its companies do their own R&D, but that could begin once they amass enough cash through their current, more dubious activities.
The rest of Asia, including Australia and New Zealand, is not on her radar screen. The health care sector is a US game, and to some extent a European one. She expects, however, that in the future China will be a player. It has a huge population and some good local science, Underhill says.
BAM’s Leading Sectors Fund is registered with the Hong Kong Securities & Futures Commission, and is in the process of getting approval from Japanese regulators. Barings is now marketing it to retail clients in these two cities, as well as the UK. Institutional sales will follow. In addition to health care, it includes exposure to tech, telecoms, media and financial services.
