Health Care: Rx for Growth and Defense

Health Care: Rx for Growth and Defense

The Capital Asset Pricing Model — used to price risky securities — suggests growth and defensive investments are mutually exclusive because the more an asset can return, the higher its risk must be. But growth itself can provide defensive benefits when a secular growth story occurs regardless of the business cycle.

We believe health care in the US will offer an investment opportunity that may provide both growth and defense for the foreseeable future because of these three factors:


  • The secular trend of an aging population.
  • The effects of the Affordable Care Act.
  • Strong economic “moats,” or competitive advantages, built by health care companies.

Emerging trend to benefit sector

Currently, 14% of Americans are 65 years of age or older  — a percentage expected to rise to 25% by 2025.1 Because elders are large consumers of health care, we expect the health care sector to benefit from this secular trend, which is uncorrelated to the business cycle.

Japan has experienced a parallel demographic situation.  As Japan’s 65-plus population rose from 1995 to 2011, to nearly a quarter of its population,2  the MSCI Japan Index had a total return of -40.6%, while the Nikkei 225 Index’s total return was -48.1%.3 By contrast, the MSCI Japan Health Care Index returned a total of 99.6%,at least in part because of the strong secular trend of an aging population.

Affordable Care Act to increase consumer pool

The primary goal of the Affordable Care Act  is to increase the number of people who are insured,  consequently increasing  the pool of people seeking medical treatment. The Congressional Budget Office projects the number of newly insured people will reach 32 million by 2018. While we realize that the projection may be overstated and that the Affordable Care Act may undergo revision, we still view it as positive for the health care industry.

Health care companies have wide moats

Health care companies, like all companies, derive their strength from building strong economic moats The stronger and wider the moat a company builds, the more sustainable its competitive advantage, allowing growth generation and providing consistent free cash flow. As this breakdown of subsectors shows, health care companies have strong economic moats, due largely to patent law and regulation:

  • Pharmaceuticals:  20-year patent protection, extremely high start-up cost, economies of scale
  • Biotech: Product differentiation, high start-up cost, patent protection
  • Medical devices: high start-up and switching costs, product differentiation, economies of scale
  • Medical services: smallest moat; must manage costs and have minimal government exposure to be successful

We believe the health care sector provides a unique opportunity — the potential for consistently strong revenue growth based on factors outside the business cycle, which may offer a defensive investment. If the US mirrors Japan’s experience with an aging population, the potential secular trend could help make health care one of the strongest sectors in the years to come.

1 Source: US Census Bureau and Aging, as of Oct. 21, 2013

2 Source: Japan Statistical Society as of Oct. 21, 2013

3 Source: Bloomberg L.P. as of Oct. 21, 2013. Total cumulative returns, including dividends, from Jan. 31, 1995, to Dec. 30, 2011.

Important information

The MSCI Japan Index measures performance of the large- and mid-cap segments of the Japanese stock market. The MSCI Japan Health Care Index measures performance of the large- and mid-cap segments of the Japanese health care sector. The Nikkei 225 Index (or Nikkei Index) is a price-weighted index measuring the top 225 blue chip companies on the Tokyo Stock Exchange and is commonly considered representative of Japan’s stock market. Past performance cannot guarantee future results. An investment cannot be made directly in an index.

The health care industry is subject to risks relating to government regulation, obsolescence caused by scientific advances and technological innovations.

Investments concentrated in a comparatively narrow segment of the economy may be more volatile than non-concentrated investments.

Ted Samulowitz
Vice President and Portfolio Manager
Ted Samulowitz is a vice president and portfolio manager of the S&P 500 Downside Hedged Portfolio with Invesco PowerShares Capital Management LLC, a registered investment advisor that sponsors the PowerShares family of exchange-traded funds (ETFs). Invesco PowerShares is Leading the Intelligent ETF Revolution®, a new generation of ETFs.
Prior to joining Invesco Powershares Capital Management LLC in 2012, Ted traded volatility arbitrage and special situation portfolios for hedge fund CMT Asset Management. Ted started his career as a member of the Chicago Board of Trade, where he worked as a volatility arbitrage trader in US Treasury bonds and notes. He then became a member of the Eurex Exchange, where he was a market maker in German equity options. Upon his return from Europe, Ted worked as a quantitative trader for Ritchie Capital Management, a Chicago-based hedge fund.
Ted holds a BS in agricultural economics degree from Purdue University.
Invesco Distributors, Inc. is the distributor of the PowerShares Exchange-Traded Fund Trust, the PowerShares Exchange-Traded Fund Trust II, the PowerShares India Exchange-Traded Fund Trust and the PowerShares Actively Managed Exchange-Traded Fund Trust. Invesco PowerShares Capital Management LLC (Invesco PowerShares) and Invesco Distributors, Inc. are indirect, wholly owned subsidiaries of Invesco Ltd.



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