Beware the pitfalls of investing in healthcare, says IFM boss

IFM Investors executive director Rikki Bannan is a keen follower of stocks in the healthcare sector, but she knows it can be a risky place to invest.

Bannan, a portfolio manager in the $215bn IFM Investors' small caps fund, overseeing its investment in healthcare, consumer companies and technology, watches the sector carefully.

But she warns that each company can face different challenges as a result of market and regulatory factors.

“Healthcare is often viewed as a stable, defensive sector to invest in, but in small caps that hasn't necessarily proven to be the case,” she says in an interview with The Australian ahead of her appearance as a stock tipper at the Sohn Hearts & Minds conference in Sydney next month.

“Even some of the defensive stocks such as radiology and pathology have had a pretty tough time over the last 18 months, with volumes lagging and companies facing higher costs given the inflationary environment.”

Pathology companies did well during Covid when they worked around the clock doing government-funded tests, but have suffered from a market downturn as fewer people visit GPs and consumers keep a closer eye on their spending. “There's been a big reduction in physical GP attendances due to telehealth,” she says.

“There is also a shortage of GPs and an affordability issue as well.”

Bannan says there is also a wide range of biotech stocks, but these can be highly risky investments.

“We still see many investment opportunities across the small caps healthcare space, but you have to be very stock-specific given the range of different sectors they are in,” she says.

She sees some areas of interest in the radiology sector, such as PET, CT and MRI screening.

At the moment, she says, the global healthcare market is closely watching the implications trials of new anti-obesity drugs.

She believes this has had a negative impact on the share price of ASX-listed ResMed, which makes sleep apnea equipment - more prevalent in people with obesity. If incidences of obesity fell away, there could be fewer incidences of sleep apnea.

“The very topical issue which is playing out overseas, but is also affecting some of the stocks on the Australian market, is what impact these anti-obesity drugs like Ozempic will have in the longer term?” Bannan says.

“The listed markets have jumped very quickly to extrapolate what these drugs could mean across the entire healthcare space.

“In the fullness of time, we'll see, and markets often overshoot. But it is something you need to keep an eye on.”

Bannan will tip an Australian small-cap stock in her appearance at the Sohn conference, but cannot reveal it until the day.

Attendees pay $3500 to go to the one-day conference - now in its eighth year in Australia - to hear the stock tips of leading fund managers from Australia and overseas, with the money raised going to support a range of medical research organisations.

Co-founders of the conference in Australia have included former UBS chief Matthew Grounds, his former UBS colleague Guy Fowler, and Sydney businessman Gary Weiss.

This year's conference is expected to bring the total funds raised for medical research by the Sohn conferences in Australia to more than $60m since the first conference in November 2016.

Funds raised will go to a range of organisations, including the Victor Chang Cardiac Research Institute, the Baker Heart and Diabetes Institute, the Cerebral Palsy Alliance Research Foundation, the University of Sydney Brain and Mind Centre, and the Florey Kids Critical Care Research at The Children's Hospital at Westmead in Sydney.

Bannan's interest in speaking at the Sohn conference stems from the death of her friend, at the age of 34, from cancer.

“I lost my best friend to cancer a few years ago and I have responsibility for the healthcare and biotech sector, so it (the Sohn conference) is something which is of great interest to me,” she says.

“I jumped at the chance when I was asked if I would like to participate.”

Bannan comes from a family with a long interest in stockmarket investing.

“I always gravitated towards subjects like business studies and economics at school,” she says.

“But, ultimately, it was my dad's influence. He started out as a chartered accountant and moved across to sell side research as an analyst. He has done that his entire career and he loves it. He always told my sister - who is also in funds management - and I that we should be doing something that's interesting, that we should try to understand how the world works.

“He thought equity markets were fascinating. The learning curve never stops.”

Bannan started her career at accounting firm KPMG, where she gained her accounting qualifications, before moving across to the sell side sector with a job at Macquarie Bank. There, she began to learn about stock analysis as well as modelling and valuing companies.

“Then the opportunity came up to move into the small-caps team at IFM and I have been here ever since,” Bannan says.

With a history dating back to 1990, the former Industry Funds Management (now known as IFM Investors) is a fund management group founded by some of the country's largest industry super funds. It manages more than $215bn. Now owned by 17 major Australian super funds, its role as a specialist investor for superannuation funds and institutional investors has seen it expand globally. It now manages money for more than 660 institutions around the world including insurance companies, universities and sovereign wealth funds.

Bannan says any fund manager worth their salt has “got plenty of scars” from mistakes made in investment calls.

“Over the years in the job, you are constantly learning from your mistakes,” she says. “The job is about constantly fine tuning your process and evolving your thinking, and learning something every step of the way.”

Bannan says fund managers need to have the courage of their conviction about a stock and not panic when the price goes down.

“You have to have conviction in your thesis,” she says.

“If a stock price is going against you, you have to ask: is your thesis intact? Is this a buying opportunity?

“It is about having the conviction to stick with your call and not panicking and selling with the mob.”

Bannan also oversees IFM's investment in small-cap retail and consumer stocks.

While the Australian consumer has been remarkably resilient so far in the face of higher inflation and interest rates, she is cautious about consumer stocks.

“The consumer has been resilient. But we haven't yet seen the full impact of higher interest rates,” Bannan says.

“Fixed-rate mortgages are still rolling off and there has been no easing up in cost-of-living pressures. And the savings that were built up through 2020 and 2021 (in the Covid lockdowns) are now largely exhausted.

“The consumer outlook is tough, but the question is: to what extent is that price in?”

“We have to be very selective about the stocks we are looking at, but I think there are still areas of opportunity in that space.”

The Australian is a media partner of Sohn Hearts & Minds, which will be held at the Sydney Opera House on November 17. Tickets are available here

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This article was originally posted by The Australian here.

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