Pillar one: Healthcare earnings resiliency 

Growth greater than GDP

Purely from a financial perspective, healthcare is a huge sector growing faster than GDP in virtually every market in the world. It consumes 10 percent of GDP in OECD markets and is close to double that in the United States. Healthcare spending is reaching twice the growth level of GDP in high-income countries; it is already the highest contributor to GDP in the US, and close to the highest in most OECD countries. In fact, between 2000 and 2019, health spending grew faster than GDP in the 29 high-income countries. Aside from being essential to human health, the sector has proven over many years that it delivers a resilient earnings growth profile, largely because of the sustained underlying demand in any economic environment combined with favourable competitive landscapes due to wide economic moats surrounding an intensely regulated industry. 

Australians underweight in sector

Healthcare is a priority for every person on the planet. The sector is huge and has tailwinds that drive continued growth, yet Australian investor portfolios are notoriously underweight in healthcare stocks and funds. Global healthcare tailwinds are unquestionable. Demographics are a significant factor with ageing populations and an expanding middle class in developing parts of the world pushing demand for treatments that developed nations take for granted today. As economies expand and the middle class grows, the healthcare sector is growing too. Government policy is another significant tailwind with healthcare a political priority worldwide. Maximising human welfare is a necessity in both democratic and authoritarian governments, driven by the expectations of the growing and ageing middle class. The number of people aged over 60 is expected to double by 2050 and the over-80s population is expected to treble; this will be the single most important driver of healthcare expenditure. Note that those aged over 65 consume three times the average healthcare of those under 65. 

Earnings are not cyclical

Healthcare enjoys earnings resilience amidst global share market volatility due to the demand driven by ageing populations, growing middle class and increased accessibility and favourable competitive landscapes. While stocks, indices and markets will bounce up and down, healthcare earnings – both historic and prospective – remain strong and positive due to underlying demand and the pricing power of necessary treatments with a low threat of substitutes. Government healthcare spending drives growth regardless of any downturn in the economy. This was evident during the GFC (and confirmed by the World Health Organisation); while government stimulus in the 29 high income countries increased dramatically to address the GFC, healthcare expenditure continued to grow. We are seeing a secular shift in global markets and economies after 40 years of falling bond yields to unprecedentedly low levels. This, coupled with the GFC stimulus have led to very easy monetary conditions, and high liquidity. That inflated bubble – where capital, credit and earnings weren’t hard to come by – seems to have come to an abrupt check. Healthcare is one sector immune to this secular shift. 

Explosion of chronic disease

Healthcare companies solving and treating chronic and life threatening illnesses are a particularly strong asset class. The prevalence of chronic disease (think Alzheimer’s, arthritis, asthma, cancer, diabetes, heart disease) has exploded, much of it due to lifestyle choices. Governments internationally are focussed on addressing the increase of chronic illness through cost effective treatments. Healthcare companies tackling these problems have underlying earnings that are resilient because the demand doesn’t go away, isn’t discretionary and can’t be deferred or substituted. Thus, healthcare consumption spending is realised no matter the market cycle; the overwhelming majority of these treatments are underwritten either by government programs or by insurers, and the consumption pattern is certain.

Pillar two: Momentum of MedTech 

Trend towards device-based treatment 

The healthcare sector is at an inflection point as the treatment of chronic illness moves toward medical technology (device-based treatment) and away from pharmacology (drug-based treatment) and biotechnology. Pharmaceutical treatments, which excelled through Covid, have proven to be enormously expensive to produce, readily superseded, and obsolete with new variants. Meanwhile, chronic disease is largely consistent. This means the MedTech innovations being developed have a ready market with a long runway of growth.

New paradigm in medical treatment

Over the past 20 years, we have seen a revolution in medical technology delivering treatments that are safer, more effective, and ultimately cheaper for those who foot the bill (insurers and governments). This transformation is no different to what has been experienced in telecommunications and automotive industries with an insurgence of technology; it is just delayed by the complex nature of medical device development and high regulatory burden or bringing a medical device to market (think design, trial, manufacture, implant, iterate, improve, implant, repeat). The healthcare industry shall experience a decade-plus of technological advancements and adoption due to the clinical trial requirements that are essential to prove the efficacy of new devices. Analysis shows there is a consistent time lag between the market’s appreciation of new medical technology and the realisation of this in company valuations, providing an opportunity to capitalise on these inefficiencies. 

The power of patents

In healthcare innovation, it takes an incredibly disruptive – or revolutionary – product to supersede incumbent medical technology. At a time when technology and innovation has become incredibly disruptive across all sectors, companies are perpetually vulnerable to new innovations superseding their products. Healthcare is one sector where patents and regulatory requirements provide a certainty of momentum that works in favour of investors. The Cordis Global Medical Technology Fund is a portfolio of companies protected by patents and subject to the highest regulatory barriers to entry. 

Optimising cost and efficiency

MedTech seeks to deliver three universal healthcare needs: improve patient outcomes, expand access, and optimise costs and efficiencies. Innovations that optimise efficiencies or make procedures a lot simpler to perform by saving time and reducing complexity are also typically easier to standardise and implement, improving access for patients. When more clinicians are able to complete more treatments in a shorter period, you’re effectively doubling, tripling and quadrupling the number of patients who have access to that treatment in a day. These innovations commonly provide faster recovery times for patients. These MedTech treatments have also proven to be cheaper for the payor over the lifetime of the patient, due to the shorter operation and recovery times, and lower rates of retreatment required. 

Pillar three: Investment insights

Framework for the Fund

Cordis Asset Management specialises in the MedTech market through the foresight of its founders, Professor Michael Vallely, a cardiothoracic surgeon, and Michael Cartmill, his medical engineer colleague. Through this foundation, Cordis developed a differentiated investment process that leverages a unique Medical Advisory Panel and Medical Device Industry Specialists consisting of leading global physicians, academic researchers, medical device experts and healthcare system executives. The investment team uses the insights of these experts to gain clarity on the long-term outlook of treatment paradigms, and research the prospect of commercial success for new technology in the medical device space. As an integral part of the team and investment process, Cordis’ medical advisory panel and network  are an inimitable and unique competitive advantage when assessing medical technology. 

Finding meaningful MedTech

When selecting stocks to invest in, Cordis starts with an analysis of the medical technology market, looking at both the financial components and the quality of the innovation. Standard practice for other funds investing in MedTech is to review broker research and company reports. At Cordis, information is gathered from directly from the coalface, from physicians and industry experts who often but not always contribute data to the reports and journals that other fund managers rely on. This is a central tool for the Fund’s analysts to build the portfolio; it provides the agility to get into and out of stocks earlier, without the delay of awaiting published data.

Stock selection with specialists

Cordis balances financial analytics of equity market specialists with firsthand MedTech and clinician experience. The medical advisory panel is a collection of learned professionals who are actively involved in medical innovations and have daily exposure to technologies that are being used in treatments today. They advise the Fund about treatments that are insufficient, ineffective, costly or time consuming and provide guidance on the alternative devices, treatments and therapies being trialled. Many MedTech ETFs and funds rely on secondhand insights to construct their portfolio. Cordis has rare firsthand insight through the medical advisory panel, elevating the quality of stock selection.

Process for portfolio inclusion

Cordis will consider a MedTech opportunity as a result of the collective intelligence from their cohort of medical specialists, complemented by a financial analysis of the company. The medical advisory panel will assess if the technology can be easily adopted by the healthcare sector; if it will fit the infrastructure or investment focus of the current hospital system, and the impact of replacing the procedure that is currently performed with the new technology. What fund managers can’t easily determine without specialist medical knowledge is that, while an idea could supersede a current technology, its deployability is a crucial factor. If the expense of implementation, retraining the workforce and removing existing medical infrastructure is too great, it’s possible that innovation will never succeed. Once a technology or treatment is endorsed by the medical advisory panel, Cordis’ investment team will use these data to augment analysis of the financials, constructing a valuation model and ‘scorecard’ of the attractiveness of a potential investment. This scorecard incorporates financial data, management quality, MAP assessment and perhaps most importantly valuation. Cordis understands that even a company with great technology that is beloved by the end users and indeed with impeccable financials may not represent an attractive investment due to valuation issues. 

Pillar four: Responsible investing

Investing with purpose

Through MedTech innovations, Cordis’ investors are having a positive long-term impact on society whilst enjoying the rewards of a sector that has an enormous runway of growth ahead of it. Every decision the Fund makes involves sustainability and responsible investment practices.

Highly sustainable fund

As a small firm, Cordis has control over the way it does business. The philosophy is underpinned by a commitment to UN Sustainable Development Goals and continuous improvement in ESG. A respected sustainability analysis company, Sustainable Platform, rates Cordis as one of the most sustainable funds in Australia. Sustainable Platform states that Cordis is one of the highest-rated funds that they’ve assessed on sustainability, attributing 89% of all dollars invested in Cordis to making a contribution to the UN Sustainable Development Goals. The analysis further suggests there is zero chance of greenwashing risk amongst any of the companies held, mitigating much of the risk of exposure to companies with poor ESG practices allowing investors an opportunity to align their investments with their values.

Invested in improving lives

As part of its commitment to aligning with the United Nations Sustainable Development Goals, Cordis is focused on investing in companies that are working to improve and extend lives. With healthcare as its only focus, and MedTech being the niche that they invest in, the Cordis team and its investors are contributing to a future of better healthcare. The portfolio of companies are focused on advancing healthcare equity and expanding access to lifesaving products and therapies. 

Aligned with United Nations

Cordis Asset Management is proud to be aligned to the UN Sustainable Development Goals under the health and wellness pillar. Their portfolio of companies contribute directly to prolonging and improving life, and align strongly with: 

• target 3.b; to support the research and development of vaccines and medicines for the communicable and non-communicable diseases that primarily affect developing countries. To provide access to affordable essential medicines and vaccines in accordance with the Doha Declaration on the TRIPS Agreement and Public Health, which affirms the right of developing countries to use the full provisions in the Agreement on Trade-Related Aspects of Intellectual Property Rights regarding flexibilities to protect public health, and, in particular, provide access to medicines for all; 
• and 3.d; strengthen the capacity of all countries, in particular developing countries, for early warning, risk reduction and management of national and global health risks.