Healthcare is such a political football that any fund investing in the sector should be well diversified. This is certainly an approach that pays dividends for the 16-year-old Worldwide Healthcare Trust (WWH), managed by US-headquartered OrbiMed Advisors.

Anyone following the controversy over the “Obamacare” healthcare reforms in the US – still a sensitive issue and likely to be so in the 2012 presidential elections – or the perennial debates about the UK’s socialized medicine system, might wonder if healthcare is a smart investment. But if a fund holds stakes in dozens of countries, including emerging market growth tigers and a diversity of businesses then this makes for an interesting sector. And with aging populations in the West and rising demand for new health technologies, the opportunities look big.

That is certainly the argument of Samuel Isaly, partner and a founder at OrbiMed Advisors – which he set up in 1989  – who spoke to this publication to lay out his views about the WWH fund. (OrbiMed oversees around $5 billion of client money.)

WWH, launched on 27 April 1995, logged a share price total return of 13.8 per cent per annum and a net asset value total return of 14.5 per cent per annum. These figures include dividend payments. (Data is up to 20 June this year.) Based on its NAV total return per annum since launch, the fund is the sixth best performer out of a universe of 123 investment trusts, according to Winterflood Securities.

Under a new name

Some readers may recall that this trust was previously known – until the autumn of 2010 – as the Finsbury Worldwide Pharmaceutical Trust. Its name was changed because the Finsbury brand is no longer associated with the trust and because the fund’s board decided to broaden its investment reach to other, health-related areas.

Isaly and his colleagues take a bottom-up approach in stock selection but they also note the broader geographic and thematic trends, whether they are hospital management, biotechnology, health insurance, medical devices and drugs. Isaly said there are three main drivers of healthcare as a sector, with two demand-side factors and one on the supply side: aging populations and consequent growth for more spending as people get older; rising incomes and greater discretionary money for healthcare; and research and discovery of new healthcare technologies and services.

The fund holds a total of around 50 companies’ securities; it is broadly diversified by sector and geography to shield it from developments such as regulatory and company-specific shocks.

As an example, his fund likes health insurance firms in the US because they have, in defiance of fears about the cost of President Barack Obama’s healthcare legislation, not damaged the private insurance sector.

“One of the best performing areas has been insurance companies in the US,” he said. WWH has 8 per cent of its assets in health insurers.

Some investors feared that US healthcare reforms under the Obama administration would drive private insurers out of business; when the reforms eventually showed this was not so, insurance firms rallied.

Also, with less elective surgery being requested as people tighten their budgets, this means lower insurance payouts and higher profits. Insurers’ shares have risen on average by 35 per cent this year, he said.

A number of new drugs are coming to the market for multiple sclerosis sufferers (Novartis), lupus (GSK), hepatitis C (Johnson & Johnson, Vertex) and prostate cancer drug Provenge (Dendreon). The fund holds all of these firms apart from Vertex, which it used to own, he said.

As for emerging markets, the fund can, due to ease of use, gain exposure via the use of a total return swap: this is liquid, inexpensive due to low transaction costs and provides broad exposure, Isaly said.

At present, the fund holds about 5 per cent of all its assets in emerging markets. “You wouldn’t want an exposure greater than 10 per cent,” Isaly said. About 60 to 80 per cent of the fund is in large-cap stocks, with around 20 to 40 per cent in the smaller firms. At present, the majority of the fund’s assets are held in US companies, with sizeable chunks in Asia and Europe. When based to 100, the regional allocations are 68 per cent for US, 19 per cent in Europe and 13 per cent for Asia.

Veteran Isaly has been active in global healthcare investing and analysis since 1968.

OrbiMed is now a substantial firm as it oversees approximately $5 billion of assets. Its largest office is in New York; it also has offices in Mumbai, Tel Aviv, San Francisco and Shanghai.