History tells us that during periods of exogenously led market rotations and black swan events, there are always winners and losers. Identifying these opportunities is what motivates us today. We think the dislocation between fundamentals, valuation and investor sentiment has never been greater over the past decade than it is now.
The metamorphosis from a pre-COVID-19 to post-COVID-19 environment is already well underway, but the duration is yet to be determined. Our task as active fundamental managers is to navigate through turbulence and the unknown and focus our efforts to preserve assets while also being positioned for future growth.
The prospects for the health care sector today are dramatically different from what they were even several months ago, pre-COVID-19, when the sector was in a lose-lose scenario, caught between pressures from both political parties: pricing concerns by the Republicans and the “coverage for all” goals of the Democrats. The health care sector was in everyone’s crosshairs. But, in our view, the landscape has now changed dramatically for the positive.
US spending on health care, as a percentage of GDP, is expected to increase from 17%, currently, to 20% by the mid-2020s.1 The US spends nearly twice as much as the average OECD (Organization for Economic Co-operation and Development) country.1
Figure 1: Projected US health care expenditures as a percentage of GDP
Health care’s growing prominence
Health care has an increasing importance both in our portfolios and in the major stock indices because of several innovative growth trends. The sector currently represents 34% of the Russell 2000 Growth Index and 17% of the Russell Midcap Growth Index.2
The recent trends within health care have been focused on the client experience. These trends include delivering tailored and customized therapies and telehealth, transitioning from inpatient to outpatient treatments, performing less invasive medical procedures, digitizing information and managing post-COVID-19 needs (such as the return to performing elective surgeries at many hospitals).
We strive to identify these trends early and capitalize on them as they emerge. We believe a number of companies that the portfolio owns are well-positioned to address these changes and benefit from them.
- West Pharmaceutical Services (with a $15-billion market capitalization) is leading global manufacturer of packaging components used in syringes and vials for injectable drugs. Because of highly regulated FDA quality standards for these products, West Pharmaceutical is the dominant supplier and enjoys high barriers to entry for other competitors. With what we consider to be top-notch management at the helm they have delivered strong, consistent revenue and earnings growth for many years.
- Masimo Corp. (with a $13-billion market capitalization) is a direct beneficiary of the COVID-19 and post-COVID-19 world. Masimo is a global medical technology company that manufactures noninvasive patient monitoring devices, most commonly used to gauge pulse rate and oxygen levels. Its devices can be used locally (at hospitals, doctors’ offices, and urgent care facilities) as well as remotely by patients at home. A management team we believe is best in class has led to double-digit revenue growth and strong future growth prospects.
- Veeva Systems, Inc. (with a $30-billion market capitalization) provides the health care industry with specific, cloud-based software solutions. Its solutions enable pharmaceutical and other life sciences companies to realize the benefits of modern cloud-based architectures and mobile applications, thereby allowing for information sharing and collaboration in patient-centric clinical trials.
Our investment approach remains unchanged. We seek to invest in premier mid-cap growth companies that demonstrate the potential for continued strong compounding growth, over a multi-year time horizon.
As of March 31, 2020, Invesco Oppenheimer Discovery Mid Cap Growth Fund had 1.5% of its assets invested in West Pharmaceutical Services, 1.8% in Masimo Corp, and 1.0% Veeva Systems.
Holdings are subject to change and are for illustrative purposes only and should not be construed as buy/sell recommendations.
The health care industry is subject to risk relating to government regulation, obsolescence caused by scientific advances and technological innovations.
- Source: Center for Medicare & Medicaid Services: National Health Expenditure Projections, 2018-2027. Forecast Summary and Selected Tables. (The report was released on February 19, 2019.)
- Source: FactSet Research Systems, as of 3/31/20
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The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the US equity universe. It includes those Russell 2000 companies with higher price-to-value ratios and higher forecasted growth values.
The Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price to book ratios and higher forecasted growth values.
An investment cannot be made into an index.
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Stocks of medium-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.
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The opinions expressed are those of the author as of June 8, 2020, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.