Ian Cowie mulls over the Chancellor's latest plans.
Much - if not most - media coverage of the Budget and other government financial initiatives tends to focus on their negative aspects, such as how taxes might reduce our earnings and income. But investors could find it more profitable to accentuate the positive and ask “Cui bono?” - the Latin for “Who gains?” - and follow the money.
For example, Chancellor Rishi Sunak’s recent Autumn Statement extended the strategy he has established since the start of the coronavirus crisis, by seeking to reduce damage to the economy by stimulating demand and supporting the National Health Service. Specific initiatives included a capital lump sum of £5.9 billion to cut NHS waiting lists in addition to the new ‘Health and Social Care Levy’, which - at the cost of adding 1.25 percentage points to National Insurance Contributions (NICs) next April - is expected to raise an extra £12 billion annually for the NHS.
It is silly to be cynical or to under-rate the scale of these initiatives. To paraphrase the former American senator, Everett Dirksen: “With £5.9 billion here and £12 billion there, pretty soon you are talking serious money.”
This fiscal stimulus - and similar strategies in other developed economies - is boosting demand for goods and services supplied by global healthcare companies, fighting a world war against the coronavirus. Such a substantial ‘shot in the arm’ should stimulate investment companies focussed on this sector.
That creates the opportunity for shareholders in these investment companies to do well by doing good. We provide capital to fund biotechnology and healthcare research - to help find vaccines, among other medicines - and accept the risk of suffering losses in the hope of earning returns.
Never mind the theory. How has it worked in practice? I have been a shareholder in Worldwide Healthcare Trust (stock market ticker: WWH) for more than a decade. During that time, WWH has delivered, er, healthy returns and is now the eighth-most valuable holding in my ‘forever fund’. This consists of 50 stocks in which I have invested my life savings, intending to pay for retirement
Morningstar, via the AIC, report that WWH has achieved total returns of 507 per cent over the last decade, followed by 89 per cent over the last five years and 8.1 per cent over the last year. I have nothing to complain about there, but it is only fair to report that several investment companies have done even better than WWH recently.
For example, Polar Capital Global Healthcare (PCGH) is the AIC Biotechnology & Healthcare sector top-performer over the last year, with total returns of 32 per cent. It also delivered 54 per cent over the last five years and 227 per cent over the last decade. Despite such sparkling performance, shares in PCGH are priced 8.1 per cent below their NAV, while WWH trades at a more modest 2.7 per cent discount.
Second place in the same sector over the last year is held by BB Healthcare (BBH), which delivered total returns of 26 per cent but lacks five-year returns because it was launched in December 2016. Here and now, BBH trades 0.9 per cent above its NAV, aided by a dividend yield of 3 per cent, compared to yields of less than 1 per cent at PCGH and WWH.
Income was part of my motivation when I invested in International Biotechnology Trust (IBT) in April last year, and it still yields 4 per cent. However, despite strong five and ten-year returns of 63 per cent and 477 per cent respectively, IBT demonstrates this sector is not risk-free with its negative total return of minus 1.8 per cent over the last year.
Other government initiatives - such as those announced at the United Nations COP26 summit in Glasgow - will increase investment in renewable energy, such as solar and wind power. That should boost demand and supply in these sectors, helping other shares I own, such as the investment companies Ecofin Global Utilities and Infrastructure (EGL); Gore Street Energy Storage Fund (GSF) and US Solar Fund (USFP).
All of these investment companies - and dozens of others like them across a wide range of sectors - diminish the risk inherent in stock markets by diversification, or not putting too many eggs in too few baskets. They also help individual investors of all sizes share the cost of professional fund management, participating in sectors where I for one lack any specialist knowledge and gaining exposure to faraway markets which trade while I am asleep.
Returning to where we began, there are obviously plenty of reasons to be fearful about risks ranging from the coronavirus to carbon emissions. Less obviously, investment companies enable shareholders to remain cheerful and seek rewards in the form of income and growth while our money makes a difference for the better.
