Is it time to look at alternative investments?

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Over the past two years we’ve seen healthcare services pushed to their limits, unprecedented government support for global economies and an impact on economies that’s rivalled that of World War II.

We’re more conscious than ever to find ways to help diversify our investments. When we think about how to do this, shares, bonds or cash are the first things that spring to mind. There are other ways though, in the form of ‘alternative’ investments.

It’s a broad category including everything from metals and timber to food and energy. Alternative investments can offer different ways to diversify your portfolio, but can be difficult to understand and value.

In this three-part series, we’ll dive into three types of alternatives – healthcare, infrastructure and agriculture. We’ll look at how they’ve performed and some of the potential opportunities they can offer investors.

These are highly specialist areas that come with more risk. We think they should be held with other types of investments as part of a diversified portfolio. This article isn’t personal advice. If you’re not sure an investment or course of action is right for you, seek financial advice.

How’s healthcare performed?

Healthcare in the most part is a necessity, not an option. The sector has tended to hold up well in periods of uncertainty – someone who falls ill will need treatment regardless of how well the economy’s doing. Over the last ten years, the healthcare sector has returned an impressive 383.4% versus the global stock market’s return of 273.4%*.

10 year performance of the healthcare sector vs the global stock market

Past performance is not a guide to the future. Source: *Lipper IM, to 30/08/2021.

Over the short term though, performance has slowed. While the healthcare sector returned an impressive 19.2% over the last 12 months, it hasn’t managed to keep pace with the global stock market which returned 27.0%.

The healthcare sector was boosted by some of the Covid tailwinds in the early stages of the pandemic. But increasing cases and pressure mounting on healthcare services globally has caused a drop in sector performance more recently.

Other longstanding industry challenges like budget pressures, changes in government regulation and rising costs of healthcare, can impact the sector too. Rising interest rates have also suppressed gains for growth stocks, including healthcare. This can be harmful for stocks that are expected to grow a lot in the future. That’s because the present value of their future profits is worth less today. This is why it’s best to invest with a long-term view.

Parts of the sector have held up well recently. Biotechnology companies have been at the forefront of addressing the pandemic, developing and distributing vaccines in record times. Being in such demand has also helped bring up the sector’s reputation, which historically has not been great.

There have also been natural overlaps in the digital technology space too. Advancements in technology have helped these companies produce a vaccine, but also enable other parts of the industry to function, despite lockdown restrictions.

What are the opportunities for investors?

The healthcare sector can be split into two main groups.

The first includes manufacturers of healthcare equipment and supplies, or those that provide healthcare services. The second revolves around those that research, develop, market and produce pharmaceutical and biotechnology products.

We spent roughly $8.3 trillion on the industry in 2020 and, unsurprisingly, we are expected to spend almost 6% more over the course of 2021.

While there are still some longstanding challenges ahead for the healthcare sector, some parts look more promising than ever.

One of the key themes within the healthcare industry currently is innovation. Advancements in technology could eventually lead to more accessible and efficient healthcare worldwide.

The pandemic has accelerated the adoption of certain digital health services, while retaining strong patient care. For example, the use of tele-medicine has allowed people to apply for prescriptions, attend check-ups and receive diagnoses online.

Drug discovery and development benefitted from the pandemic. Biotechnology companies have been able to research, develop, test and then distribute vaccines in record time. This technology can also apply to future drug or vaccine work too.

Other areas have been progressing well, despite the Covid disruption. Improvements in diagnostic tools could mean hospitals are able to identify some illnesses at earlier stages. This is good for patient care and recovery prospects. It’s also good for hospitals being able to reduce costly late stage procedures and potential admissions.

Although innovation has the potential to reduce cost, it could make healthcare more expensive in the short term. Spending will also increase as the population gets older. A person over 80 is likely to be five to seven times more expensive to public healthcare than someone in their 30s.

That said, this growing need for healthcare and pent-up demand off the back of the pandemic could fuel the appetite for healthcare companies for years to come. We’ve already seen a number of companies list their shares on the stock market over the last few years and governments will continue to spend more on streamlining the industry.

Investment ideas for investing in healthcare

These areas could provide some exciting opportunities for investors. But it’s important not to get carried away just because there’s exciting technology and new drugs being discovered. Healthcare companies can be at the mercy of changing government regulation, which means the large investments in technology or drug research could fall at the last hurdle.

A specialist area such as healthcare should only form a small part of a well-diversified portfolio. One way to invest in healthcare is through a fund or investment trust. These can either be run by specialist managers or as part of a more diversified fund or investment trust which invests in healthcare companies. Here’s a closer look at three healthcare investment ideas.

Investing in these funds and investment trust isn’t right for everyone. Investors should only invest if the investment’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks before they invest, and make sure any new investment forms part of a diversified portfolio.

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