Updated 30 Jun 2021
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The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report or an affiliate company and that there may be a conflict of interest which could impair the objectivity of the research.

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Demographics have re-entered the conversation after China further relaxed its now-three-child policy. However, for healthcare investors, the implications of ageing populations are less straightforward than they first appear…

It is a widely discussed fact that populations around the world, especially in developed nations, are ageing.

A problem that has long plagued Japan has now spread gradually westward through China and now into Northern Europe. While many observers predicted that a post-lockdown baby boom would emerge there has been scant evidence of this in the data thus far.

Equally, precedent suggests that it is unlikely to emerge, with societal catastrophes such as wars and recessions typically leading to a decline in the birth rate. Further, the slow pace of the economic recovery from COVID-19, particularly in employment prospects for younger workers, means that a 'bounce back' in the birth rate has limited prospects, with a more permanent decline looking more likely.

At the same time, improved healthcare among the wealthiest generation in history means that life expectancy continues to rise, bar the impact of a global pandemic. Together, these trends suggest that the dependency ratio (the number of people not of working age (working age is usually defined as 15-64) as a proportion of the total population) will continue to rise. If the birth rate truly doesn’t fully recover, this should simply rise faster.

The consequences of reduced childbirth

While an ageing population is typically viewed as a straightforward boon for the healthcare sector, the long-term impact of a rising dependency ratio is less straightforward.

With the burden of paying for pandemic support likely to be kicked down the road for a while at least, tax burdens are almost guaranteed to rise in future, as demand for healthcare also increases the stress on the tax system. At the same time, savings rates have plummeted in developed societies, meaning that the future elderly are unlikely to be as wealthy as their present-day peers.

In terms of healthcare this means that two trends are likely to collide: a growing demand for healthcare, combined with reduced means through which to fund it.

It is clear that the healthcare sector is unlikely to stay the same in light of this. Yet, predicting how services will change and how health outcomes will be measured in the future is a challenge.

Healthy healthcare investing  

This is a challenge the managers of BB Healthcare (BBH), Paul Major and Brett Darke, have been considering for some time. Fundamentally, they look for companies that are helping western government fulfil healthcare needs more effectively at a lower cost, such as through operational improvements or incorporating technology.

Crucially, these aren’t next week’s winners; the managers invest on a three-to-five-year view, looking for companies at the forefront of longer-term change.

An example of this trend, in the trust’s top ten portfolio holdings, is Hill-Rom Holdings. Its operating subsidiary, Hillrom, is focused on healthcare ‘connectivity’. In practice, this means everything from communications between medical professionals and their patients, smart hospital beds, and even monitoring equipment for patients, such as ventilators and vital signs monitors. Collectively, this equipment should help embed improved efficiency within the operations of healthcare providers.

While the company’s stock price experienced some volatility during the height of the pandemic in 2020, over the long term it is an exceptionally strong performer, returning c. 123% in the five years to 16 June 2021. At the same time, it has seen a resurgence in its stock price in the last six months as the value of what BBH calls ‘managed care’ has come back into focus.

Long-standing returns from longevity

The trust’s long-term focus and clear investment thesis has in our opinion contributed to it consistently outperforming its benchmark index. Since the trust’s launch on 6 December 2016 to 31 May 2021 it returned 106.8% in share price terms, while the MSCI World Healthcare Index posted a total net return of 70.7%.

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