Elizabeth Trinh

The American Century Healthcare Impact Equity strategy has been awarded responsible investment certification by the Responsible Investment Association Australasia (RIAA).

This certification also applies to the Zurich Investments ACI Healthcare Impact Fund which is available to investors in Australia and is distributed by Zurich Investment Management Limited.

While a growing number of Australian-domiciled equity funds are RIAA-certified, only a small number of impact-based funds have passed the test.

The Fund is a differentiated growth portfolio which invests in companies in the health care industry, and has an underlying investment philosophy that aligns with the third United Nation’s Sustainable Development Goal of good health and well-being.

American Century’s interim head of Asia Pacific, Elizabeth Trinh, said the manager is particularly pleased that RIAA has certified the strategy as one of a very select number of funds to be recognised for their impact.

“It’s testament to the work by the investment team who employ a number of responsible investing strategies to the process, including negative screening, engagement and voting, and ESG integration.

“All companies in the portfolio undergo analysis on how business improvements align with a positive impact on society. The Fund doesn’t invest in businesses it believes are inconsistent with its objective of generating positive social change.

“The strategy continues to attract strong demand from Australian institutional investors, and we anticipate the certification will only strengthen the level of interest in the Fund,” she said.

The strategy was established in 2018 and currently has $US1.58 billion in assets under management globally. It is a high-conviction portfolio which seeks to provide long-term growth by investing in 30-50 health care companies addressing significant unmet medical needs.

Michael Li, portfolio manager of the Fund, says the global pandemic shone a light on the health care sector as a means of generating both financial and social good.

“Healthcare has the potential to be one of the most rewarding areas for investment in the long term, allowing investors to benefit financially while also supporting a tremendous social good.

“The certification is recognition that our impact investing process is robust and effective. Our approach is to consistently look for those companies who can provide solutions to unmet medical needs, and the ability to do well by doing good has never been more important,” he said.

RIAA CEO Simon O’Connor said: “RIAA’s Responsible Investment Certification Program differentiates quality, true to label responsible investment products which meet the Responsible Investment Standard. We congratulate American Century for meeting not only the high benchmark set for certification for its Healthcare Impact Equity Strategy, but the extra requirements for financial products trading as ‘impact’.”

RIAA is a member-based organisation advocating for responsible investing and a sustainable financial system. It’s comprised of super funds, fund managers, banks, consultants, researchers, brokers and financial advisers, among others.

With 500 members, including American Century Investments, representing US$29 trillion in assets under management, RIAA is the largest and most active network of organisations engaged in responsible, ethical and impact investing across Australia and New Zealand.

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Elections have consequences, but that doesn’t mean everything we hear on the campaign trail will manifest as policy. It’s hard to accurately predict which political party will win the presidency, which party will control Congress and whether the policy agendas of the executive and legislative branches will align. That’s why we think it’s a mistake to make investment decisions based solely on expected or actual election outcomes. Companies that innovate and provide cost-effective solutions to our most pressing medical problems are likely to do well over time. Ultimately, we believe the long-term outlook for the health care sector is positive, though we recognise that the election is likely to be a source of near-term volatility.

Innovation and growth drive financial outcomes

No matter the political environment, we seek to own quality, innovative growth companies that are well managed. Individual companies in each sector and industry deal with legislative and regulatory hurdles with varying degrees of success. Even within politically advantaged or disadvantaged industries, some companies fare better than others because of their unique capabilities and opportunities. Making indiscriminate buy or sell decisions based on political expectations or outcomes fails to account for this reality.

Despite ACA Fears, health care companies have outperformed

The Affordable Care Act (ACA) is one example demonstrating the pitfalls of investing based on political outcomes. Health care remains front and centre in this election cycle, and we have 10 years of financial data since the ACA became law in 2010.

Primary goals of the comprehensive legislation included making health insurance affordable for more people, expanding Medicaid and supporting innovation to help lower health care costs. Different provisions of the statute have faced challenges in Congress and state legislatures. The U.S. Supreme Court will hear oral arguments in a lawsuit over the constitutionality of the ACA’s insurance-purchase mandate one week after Election Day on November 10.

Looking back, it was clear the ACA would bring significant changes to insurers, health care providers and pharmacy benefit managers. Yet, in the decade since the ACA became law, health care stocks have outperformed the S&P 500® Index by more than 1.6% annually on average. Some industries have outperformed significantly—Life Sciences Tools & Services, Biotechnology, and Health Care Providers & Services outperformed by roughly 7%, 5% and 3%, respectively, per year on average.1

…the ACA makes a compelling case for ignoring political rhetoric and focusing instead on companies that could deliver innovation and more cost-effective care.

So, avoiding health care stocks over ACA-related fears clearly would have been a mistake. Of course, past performance cannot predict future results, but the example of the ACA makes a compelling case for ignoring political rhetoric and focusing instead on companies that could deliver innovation and more cost-effective care.

Current proposals unlikely to significantly alter the health care landscape

We believe it’s unlikely that either presidential candidate will make policy proposals that significantly disrupt the health care sector. Plans seeking to improve the system through modest changes are more likely.

For example, President Donald Trump issued a September 24 executive order titled “America First Healthcare Plan” indicating support for insurance coverage of pre-existing conditions (consistent with current law). The directive also mentions efforts on drug price transparency, drug reimportation from Canada, and proposed discount cards for millions of Medicare recipients. Many of these positions have either already been enacted or previously announced, so they don’t entail any meaningful changes to the current health care system.

Nor do we believe Joe Biden’s policy proposals would disrupt the current structure of the health care system. It seems reasonable to expect he would support the ACA and offer the option of buying into a “Medicare-lite” program. Any such policy changes would likely require Democratic control of both houses of Congress.

Don’t be distracted by political wrangling

Accurately forecasting and investing in anticipation of potential electoral changes is hard, and we discourage investors from using this strategy.

We believe quality businesses that are agile and innovative will continue to grow under various environments regardless of which political party controls Washington, D.C.

Because health care is a politically contentious issue, we try to look past the rancour to focus on health care companies’ societal impact and financial returns over time. We believe quality businesses that are agile and innovative will continue to grow under various environments regardless of which political party controls Washington, D.C. In our view, innovative companies offer the potential to create the cost-effective, long-term health care solutions that any policy reforms would aim to achieve

No matter how the 2020 general election plays out, we expect a broad range of potential consequences for companies trying to navigate regulatory and legislative changes. How different companies maximise revenues and what each does with those cash flows—pays dividends, reinvests in the business, acquires competitors etc —largely determines business results. Over time, we believe these factors drive investment success, not legislative or political wrangling.

By Michael Li

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Michael Li

A renaissance of discovery and innovation within the global healthcare sector is likely to stimulate investor demand for health care stocks, according to American Century Investments®’ senior portfolio manager, Dr Michael Li.

Scientific discovery is growing at a rapid pace in the health care field due in part to a more in-depth understanding of the human body after completion of the Human Genome project, lower genome sequencing costs, and enhanced capabilities of technology being applied in health care.

“We have approximately 600 million people worldwide age 65 years and over, so there’s a rising demand for healthcare services, as well as increasing wealth levels in China and India in particular, to access health care.

“This will place significant stress on healthcare systems, so we need to invest in infrastructure and capacity, but innovations in treatments and drugs will be a primary means to address the issue,” he said.

Dr Li said healthcare company earnings are traditionally less cyclical than the overall market, and despite COVID-19 presenting challenges with some elective procedures being postponed, the earnings outlook remains strong.

“The nature of the healthcare business is such that even during the global financial crisis, earnings for healthcare stocks still grew slightly, demonstrating that there’s less volatility in earnings. The current period does pose unique challenges with hospitals understandably prioritising cases of COVID-19 and delaying surgeries and patients becoming worried about infection at healthcare facilities, but certain procedures can only be delayed for so long.

“Healthcare stocks tend to perform well irrespective of the cycle and have historically outperformed the market by almost two per cent on average, especially during periods when macro uncertainty is prevalent. When innovation delivers new products and services, it tends to outperform, and the current environment is especially conducive to innovation,” he said.

The healthcare sector is currently trading at a discount to both the broader market and its usual valuation so on that basis, the sector is quite attractive. In addition, investors are starting to recognise the value of innovation and agility of many health care companies.

While American Century Health Care Impact Strategy currently has most of its portfolio in U.S. health care companies demonstrating great potential of sustainable earnings growth and profitability, Dr Li also cites the growing emergence of innovation in other jurisdictions.

“We’re fundamentally mindful of what’s happening in both the U.S. and globally. A lot of countries are investing considerable capital and resources into the healthcare space, and the level of innovation reflects this, particularly in parts of Europe and Asia,” he said.

The strategy incorporates a mix of early-stage and more established health care stocks to sufficiently balance its risk.

“Early-stage companies do present a higher risk and return profile but that’s to be expected. For each company, we evaluate their long-term sustainable growth potential and if that growth will also create a positive impact on society. For example, we review biotech and biopharma drug development pipelines and assess their market share potential and are particularly focused on companies addressing large unmet medical needs.

“We also look for companies that are truly innovative and transforming how healthcare is being delivered, assessing the impact these companies can create for the patient,” he said.

The strategy uses a proprietary multi-factor model to rank health care stocks based on fundamental acceleration, earnings quality, relative strength and valuation. Each of the 30-50 stocks in the portfolio must be tied to the third United Nations’ Sustainable Development Goal, which is to ensure healthy lives and promote well-being for all at all ages.

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