Healthy clients with a healthy portfolio
Healthcare plays an important role in the investment fund industry. Rising life expectancy means growing use of health services, while advances in the medical and pharmaceutical fields lead to new drugs and increase costs. At the joint German/Luxembourg conference on health as an economic factor, held at the Luxembourg Chamber of Commerce, ALFI chairman Claude Kremer said that healthcare was a very promising industry. At the same time, the chairman of the Luxembourg investment fund association warns against a number of risk factors.
Claude Kremer lists a number of factors that lead to the rising importance of healthcare for the fund sector. Social progress and demographical change both lead to increased use of medication, medical advances lead to the development of new and expensive drugs and political developments such as the healthcare reform in the United States lead to increased spending.
All these factors influence investor decisions, says Claude Kremer, quoting a survey by the German Institute Schleus: “Most investors who consider healthcare as being a profitable sector are conservative, lay investors who delegate asset management. Professional management is one of the key reasons that private clients select a particular fund.”
He adds that investors don’t need to be experts in biotechnology, but they should bring patience and strong nerves. “Investors have to stay cool when the fund is losing ground. The health sector is quite anti-cyclical, which means that it is less correlated to other sectors. This can be advantageous during a recession.”
The health sector is also very popular with institutional investors, particularly pharmaceutical and biotech companies. In the biotech sector for instance, the challenge for asset managers is to differentiate between research results that will lead to sellable medical solutions and those that will not. Claude Kremer underlines though that there is the other side of the coin.
“As in any asset class or sector, healthcare is not risk free”, continues Claude Kremer. “Let me name you some of them: the expiration of patents, pharmaceutical companies with empty product pipelines, generics being sold as cheap alternatives and cuts in government health budgets”.
Whilst economic growth is moderate in the Western world, rising prosperity in emerging countries leads to double digit growth of the healthcare sector. Claude Kremer believes that the fund industry is prepared for this. The business model is usually based on external financing, which means that funding typically comes from the private equity industry. Venture capital funds invest in startups and are medium to long term investors.
This is good news for Luxembourg. “In recent years the financial centre has become a great platform for taking advantage of this worldwide growth phenomenon. The Investment Company in Risk Capital (SICAR) and the Specialised Investment Fund (SIF) are flexible, competitive products that have made Luxembourg one of the leading countries in the private equity market.”
Claude Kremer closes by saying that the law on Specialised Investment Funds has been particularly successful. Since taking effect in 2007, more than 1,100 such funds have been created in Luxembourg with 200 billion Euros under management. CW