Medtech: a growth engine to diversify your portfolio

Our next presenter is Jacob Selemeyer, portfolio manager at Cordis Asset Management.

Jacob joined Cordis from Inception.

An instrumental part of the portfolio construction process, he will talk about Mettech, in his view, a growth engine to diversify your portfolio.

Welcome, Jacob.

Great, thank you very much for having me on today, Angelina.

I'm looking forward to presenting about Medtech, that growth engine to diversify your portfolio.

And while I kick off, I'd just like to talk about the three key things that I want you to take away from the presentation today.

And they are that Medtech has returned 14.1% per year over the past decade, and is still only in the early stages of a long-term secular trend

That has been underwritten by strong demographic tailwinds and an oligopolistic industry structure, which is driving top line growth and bottom line profitability, respectively.

And third, Medtech is a strong impact investment opportunity, promoting a healthier population and easing the global financial burdens faced, particularly in the developed world.

So to begin, I want to talk about Medtech as that top performing equity sector.

And here I've got a chart going back to mid 2006, which was the first time that the Dow Jones US Select Medical Equipment Index was launched.

That is the line in dark blue.

And the other lines are the S&P Global 1200 Healthcare in blue,

in light blue, the S&P Global 1200 in that aqua or very light blue, the S&P 500 in green, which are grouped down the bottom, and then the NASDAQ up the top of that dark blue Medtech line.

Now, what I want to highlight here is that over the past 15 years, that bull market that we've been in since the 08-09 crash, Medtech has been neck and neck with the NASDAQ.

And while people tend to think of this being a bull market driven by tech, software, IT, Medtech has actually kept up really well in terms of the return profile, albeit not as big a sector, so not driving the market as much.

But compared to one another, their returns have been very similar up until 2023, which I'll touch on later, but the divergence there has been driven by the mega cap

AI Boo, and the GLP-1 uncertainty in healthcare.

So the key takeaway is that over this long-term timeframe, MedTech has been a top performing equity sector.

And now I wanna touch on why a satellite allocation to MedTech provides a great portfolio diversification benefit.

Here you can see in that top line, the returns that the MedTech portfolio has judged by Dow Jones

are from that index creation in 2006 at a little bit over 12 and a half percent.

But the really impressive things are the correlation coefficient of 0.78 or 78% to a global equity portfolio.

The batting average there in the middle indicating that Medtech outperforms a global equity index about two thirds of the time.

And the capture ratio where Medtech is getting more upside and less downside

than that global equity core allocation.

So a satellite allocation to MedTech can really enhance returns while providing a diversification benefit.

And now I'll quickly touch on the why.

And the key tailwind is the ageing population driving demand growth.

Here on the left, we've got a graph showing the ageing population

the number of people over the age of 60 in the blue columns, which is doubling again from 2020 to 2050, like it did from 1990 to 2020.

But the really important thing is that grey dotted line indicating that the portion of that population as a segment of the entire population is more than doubling to over 15% by 2050.

Now, as we

have researched heavily and is now well known.

The number one comorbidity for chronic conditions is actually age.

So the ageing population are getting more chronic disease than ever before.

And the best way to treat that is with medical technology.

And it has been a revolution in medical technology that has allowed better treatment for that ageing population.

The result of that though, is the graph on the right showing the incredible boom in global healthcare market growth up to $15 trillion by the end of the 2030 forecast period.

And through the end of the decade, Medtech will grow 11% or the fastest rate within healthcare.

Now to talk about the competition within the healthcare, within the medical technology segment,

which is underwritten by that demand growth.

And the key is that high barriers to entry are really driving pricing power.

So things like the high regulatory requirements, the significant upfront capital investment and the intellectual property hurdles make it a very daunting prospect to enter the market, which is why we really only ever see two, three or four players in the key growth segments of the market.

And then even when you do get in there, you've got to overcome established distribution networks and an incredible brand reputation built up over many years in these healthcare companies, because you want a healthcare company, which is implanting, you know, a heart valve or a shoulder reconstruction to really know what they're doing.

Now, those barriers to entry really create an oligopolistic landscape where, as I mentioned, only two, three, four players can compete.

And that is evidenced in the average gross margin of the Medtech portfolio, here shown to be a little bit above 60 percent compared to around mid 30s in the broad U.S. market.

gross margin is the first level of protection against things like inflation.

And we've seen that really come to the fore in the past two or three years.

And it is really a benefit in that competitive landscape where you can take price to protect the bottom line of the companies that we're looking at in Medtech.

The final point of the three is that a Medtech investment is really an investment with impact.

It is targeting the UN's third sustainable development goal, good health and wellbeing.

And you can see here that the exposure to contribution to UN SDGs in a MedTech portfolio is above 80% compared to the Miski World Index, which is a touch below 40%.

So these companies are having a much bigger impact on not only on

the population but the planet because we are also easing the global healthcare budget by treating these patients more effectively.

So if you buy into all of that, why would you invest now?

We really view it as I've touched on as a long term trend, which will continue for multiple generations, not a year or two.

But there has been a really interesting bifurcation in healthcare

during 2023 and 2024 that I want to highlight here.

This is a great chart from BlackRock showing in the blue columns the total return of each sector from January to mid December 23.

the 12 month forward earning forecast for 2024 in the grey column and the 12 month forward sales growth forecast in that white dot.

The interesting thing is that healthcare has the highest forecast earnings growth of any sector for 2024, but that bifurcation

where the returns in 2023 didn't follow the fundamentals really presents a great opportunity now because of all the reasons I've outlined before, we think that the returns will have to catch up to the fundamentals over the long term.

What you can see here is that

that the 12-month forward earnings growth are highest in medtech.

And we expect that to continue because of the things that I've outlined earlier.

And if you buy into all of that, how would you invest?

That is where the Cordis Global Medical Technology Fund can come into it.

We like to, we've got all the detail there in the table.

for you to read.

But what I will highlight to you while I'm here is in the far right hand side, we've got a great rating from SQM of 4.25 superior and high investment grade and easy accessibility into the Qantas Global Medical Technology Farm through platforms like Colonial NetWealth Hub, Macquarie Dash and Mason Stevens.

So you can get into our daily liquid fund easily.

We are the only pure play global public equity medical technology fund in the country.

So a really great daily liquid way to access this high growth part of the market.

So I just want to reiterate the three things I would love you to remember today.

is that MedTech has been a top performing sector for many years and for the reasons outlined today is likely to continue to be for many years to come.

MedTech is driven by the secular tailwinds of an aging population and the ability of medical technology to treat that aging population.

And finally, an investment in MedTech is promoting a healthier world for all the people in it.

Thank you for your time.

Thanks, Jacob.

Do you have time for two questions?

Yeah, absolutely.

You believe Medtech is likely to become the gold standard treatment.

Can you unpack that and what is the current gold standard if not Medtech?

Great question, Angelina.

What we've done with, the work we've done with Medtech has given us the belief that, you know, over a 200 year period,

as healthcare has developed, we've really trained our medical system around the treatment of acute care.

If you get a pain, if you fall over and break your arm, you go in to get treatment and pharmaceuticals have been a really good way to dull and numb the pain.

But we've done such a good job at acute care treatment that we're keeping the population alive for longer and longer.

And that is when the human body will begin to fail.

Your shoulder joint from overuse because you're now dying at 80 or 90 rather than 40 or 50 will fade.

The valves in your heart will weaken.

And the human body is better understood in that regard as a mechanical machine than a chemical compound.

So an implanted medical device will better address the chronic conditions faced by the ageing population as opposed to the acute care treatment we've needed and really achieved over the past 100, 200 years.

For a market sector that you point out as quite resilient, why have you experienced so much volatility over the short life of your fund?

A very good question again.

The differentiation that I want to point out here is that when we talk about the resilient nature of healthcare and medtech, we're talking about the underlying earnings of the companies that we deal with, rather than the stock price and market cap of the companies, because we don't control the stock price or market cap.

And neither do the great managers that we've invested in in the portfolio.

What they do control, though, is the ability to harness the tailwinds that we've talked about.

And over time, and much like in that BlackRock chart, the earnings growth is very resilient.

And we know that the fundamentals will catch up over the long term.

In the short term, over periods like COVID and the GLP1 uncertainty, they haven't changed the long term prospects for healthcare, but they do create uncertainty in the market that investors do not like.

As we overcome that uncertainty, we do tend to see the stock prices revert to following the fundamentals, which is where the resilient earnings really come through and we believe will be the driver over the long term.

Thank you Jacob.

Thank you Angelina.