The markets have certainly had their share of challenges over the past couple of years and have triumphantly relented to new highs. But, this new market environment is set to challenge most traditional portfolio allocations and working assumptions of the past decade. In the midst of quantitative tightening by global central banks, rising inflation, and volatile conditions, this all begs the question: where is the love?

We recently launched the Purpose Healthcare Innovation Yield ETF (TSX: HEAL) at the turn of the year to help investors tackle some of these challenges so their portfolios can love them back. In light of the Valentine’s Day festivities, here are five reasons to love HEAL.

1.  Valuation: secular rotation into value💕

The past decade or so has been dominated by growth-oriented names taking all the headlines and making up sizable allocations in the indices we all track. Years of easy monetary conditions have led to many client portfolios being concentrated in high-growth names at high valuations. The S&P 500 has come under the whims of these forces as any outsized moves in the large technology companies can materially impact the performance of the index.

As these concentrations have grown, we have seen meaningful headwinds rear their head in the form of CPI rising to 7.5% last month, which could likely lead to a more aggressive posturing from central banks to tame rising inflation and low real yields. It is exactly this that poses a threat to high-growth names that are highly sensitive to changes in interest rates and real yields.

As valuations skyrocketed over the past couple of years, the healthcare and biotechnology sectors have been tending to very attractive valuations ripe with potential. Below you can see the price-to-earnings ratio of the healthcare sector relative to that of the broader market, showing that healthcare is currently underpriced.

Price-to-Earning Ratios of the S&P Healthcare Index vs the S&P 500

The launch of HEAL comes at an opportune time to take advantage of attractive valuations in the marketplace. The stage is set for an overdue recovery in the sectors positioned to thrive in a market rotation for investors still seeking growth and innovation. The timing in terms of valuation is extremely compelling for HEAL, offering investors opportunities to achieve growth at a reasonable price.

2.  M&A potential💗

The same attractive valuations make the sector an opportune place for mergers and acquisitions. If deals strike the right balance of synergies at the right price, then the ripple effect could be quite accretive to the end investor.

Dealmaking in the sector has also been the lowest it has been in a decade. Deals that can expand upon the capability of some of the large players in the space have become more relevant than ever, granting the ability for companies to expand into supplying services and therapies on the cutting edge with mRNA and gene-mapping/editing.

In the run up to 2022, you saw traditional, large-cap pharmaceutical companies look to get rid of non-core assets that may have expiring patents with the intent of buying into more of these innovative technologies. There is an estimated $500 billion in freed up capital across the sector to fund such acquisitions as shown in the graphic below.

Deal Volume and Value in Healthcare, Pharma, and Life Sciences

Leveraging the expertise of our portfolio management team, the HEAL portfolio consists of exposure across all market capitalizations in biotechnology and healthcare, giving investors allocations to the large mainstay companies as well as high-growth, innovative firms.

3.  Active management💕

Eden Rahim, a seasoned portfolio manager with an academic background in molecular genetics, offers tremendous value to the fund. We believe active management is a massive value-add, specifically in specialized sectors like biotechnology and healthcare. With over two decades of experience in this space, Eden truly understands the math and the science of biotech investing and navigates through market cap screens as well as economic moat.

Identifying fruitful opportunities is not the only way to extract value for investors—active management also provides new and innovative ways to get that exposure. Not only does HEAL offer access to both stable, blue-chip equities but it also offers exposure to innovative technologies at a reasonable price to set the stage for long-term growth.

Another significant contribution from active management is to enhance the strategy with an attractive yield. HEAL is laser-focused on delivering quality dividend yield with an enhanced option overlay strategy. The portfolio management team is able to extract further income from writing out-the-money calls on some of the more volatile names in the portfolio to capture the rich premiums made available. This means the investor being able to better meet their income needs in their portfolio while simultaneously knowing the captured premiums will steady returns and minimize volatility.

4.  Significant diversification benefits💗

HEAL provides solutions that address real investor needs, such as portfolio diversification. Much of this has to do with our holistic approach to investing that considers the many moving parts of a portfolio.

Given that fixed income has been under pressure with the looming threat of even greater interest rate hikes and tightening monetary conditions, many investors have flocked to equities to achieve their returns and reach their income targets. This poses a threat for portfolios at large and can challenge many of the diversification benefits of owning fixed income or alternative assets.

If we are to continue into a difficult market for fixed income, it becomes ever more important to have portfolio allocations that can offer diversification benefits to the investors—and this is where HEAL shines.

Diversification is often defined through broadening the scope of investment beyond a few securities and through paying attention to correlations. The reason equities and fixed income complement each other well from a diversification point of view is because they have a historical inverse relationship that will provide protection in the situation that markets fall.

Healthcare more broadly has a low correlation to traditional, broad-based equities, which should lead to defensive characteristics in market downturns with HEAL offering additional downside protection from option overlay strategies.

Correlations of Major Biotech and Healthcare Indexes

HEAL is not an alternative to fixed income but it certainly plays its part as investors allocate and rebalance their equity buckets with a lens on reducing concentration and bringing back the good old concept of diversification.

5.  Innovation leading to heightened growth💕

2020 was a year that challenged many businesses and, certainly, the world at large. If it wasn’t for the speedy action of innovative partnerships in the healthcare space, we may have been in a more challenging predicament. Thankfully the innovation in biotechnology and healthcare offered a glimpse of hope, building upon advancements in mRNA technology. This is just one example of many impactful innovations and advancements the sector can offer.

Much of this future innovation is bolstered by the fact that the cost of sequencing the human genome has plummeted since 2000, and the cost to decode the human genome has plunged from $2.7 billion to under $1,000 per DNA sequence. The implications of this are massive as it seriously reduces the barrier to innovation in technologies that can better diagnose and treat ailments through gene editing, Crispr technology, stem cell therapy, and animal cloning, to mention a few.

Historical Cost of Sequencing Genomes

One such innovation is the advancement in gene-editing that allows for pig transplants to be used for humans. An aging population hosts a multitude of challenges for society at large and one comes in the form of a growing list of those awaiting organ transplants from a much smaller supply. For example, did you know that a team in Maryland successfully transplanted a pig heart into a patient?

HEAL is allocating to the brightest minds in the space to offer our investors the ability to take part in investing in our future while benefitting from the practical and monetary gains that come from it. To have a team that intimately understands the technologies and science at play is truly a massive advantage when deciding how to allocate your investment capital.

There are many reasons to love HEAL, but if you are looking for a dynamic, high-conviction portfolio providing exposure to cutting-edge healthcare and biotech companies, look no further.

-Adam Nowak, Product Manager at Purpose Investments

All data sourced from Bloomberg unless otherwise noted.

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