Monday 21st of November 2022
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Summing up what we wrote last week...
Last week, as part of our ongoing series on long-term investing, we introduced the idea of ‘going up the value chain’.
To summarise: we think investors who want exposure to long-term growth themes in the global economy, like climate change mitigation or artificial intelligence, should beware of investing in the more obvious front-line businesses exposed to that particular trend, which can often be overcrowded and so over-valued. Typically, the least crowded and most interesting investment opportunities when investing in structural growth trends are discovered by mapping out and searching for investments within the broader value chain for the relevant industries. This process of building out a universe of businesses with differing exposures to the same trend can uncover diverse and appealing long-term investment opportunities at much more attractive valuations.
This week...
We can apply this methodology to an investment theme which touches all of our lives, quite literally. Human health and wellbeing is undoubtedly one of the most important of the investment trends we research at Dominion. There really is nothing more important than the health and happiness of our friends, family, and fellow humans around the world. This is also a trend of extraordinary magnitude, with many sub-trends converging to create a global mega-trend which is transforming billions of lives.
New and emerging medical technologies to treat disease, ageing populations, emerging markets and increasing global wealth, changing cultural attitudes towards wellness and mental health, the utilisation of existing technologies to improve quality of life. All of these seismic changes in the world are happening at the same time and translate into a structural investment trend that investors can gain exposure to: that of people around the world living, on average, longer, healthier and more meaningful lives
As investors we can be part of the solutions to many of the problems standing in the way of all humans living long, healthy and fulfilling lives. When you buy shares in a business that is, for example, offering genetic testing services to help detect and treat cancer, or a company engaged in early stage research to discover new drugs to treat dementia, you as an investor are supporting that business via your capital allocation decisions, effectively providing the capital base for those companies to continue investing in their services and technologies. As capital allocators we really can change the world in a positive way by allocating investments to businesses facilitating change.
Mapping out the value chain in the global health and wellness trend is especially interesting since we are, by the very nature of this trend, having to look at everything from frontier technology in genetic medicine, to businesses involved in looking after the health of pets (a healthy dog makes its owner much happier!). Robotics companies researching and developing ways for people with disabilities to be able to walk again, businesses who provide the services to correct eye-sight problems, suppliers of high quality services to care for the elderly, education providers training the next generation of doctors and nurses, even the manufacturers of the components used in vaccine production. The value chains we can gain exposure to by digging deeper into the theme of human health and wellness is incredible in its scope and breadth.
As people live longer, their need to access healthcare and wellness services increases. As populations live longer, the trend of ‘ageing populations’ supports structurally rising demand for related healthcare products and all of the services that make up the wider value chain already discussed. This is a powerful and predictable driver of an investment trend, and it is self-reinforcing too. As current and emerging technologies help people live longer and healthier lives, it prolongs their lives and thus increases future demand for health and wellness. This positive feedback loop is a powerful driver, if investors can gain exposure to it, for compounding returns on investment over the long-term.
Having some portfolio exposure to this theme also offers an additional risk mitigation benefit. The demand for health and wellness has a low income elasticity of demand and is often subsidised by governments. This means that during periods of macro-economic uncertainty, as we are currently very much living through, the demand for healthcare and related products and services is often largely unaffected. If someone is diagnosed with an illness, they are going to seek out the best treatment they can find and it will increasingly often be an insurance company or government paying, and so the relevant service or treatment remains in demand, whatever the economy may or may not be doing at that moment in time.
It therefore makes a lot of sense for investors to look at their portfolios and ask themselves: am I appropriately exposed in this trend? Given the ongoing uncertainty for the global economy going into 2023, it may even make sense for investors to ask themselves: should I make exposure to this trend a core investment position for my portfolio over the next 12-24 months, not just to gain exposure to one of the most exciting growth themes out there, but to also help my portfolio weather a volatile and uncertain outlook for the global economy.
Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI. Copyright © 2021 Dominion Capital Strategies, all rights reserved.