The last few years have seen some significant structural changes to the global economy, which present both opportunities and challenges for investors. Some of these developments have most likely been accelerated by the pandemic, while others have happened in parallel, having been established over many years. The current focus of the capital markets is on the rising level of inflation in the global economy. This is an issue which is a direct result of events during the pandemic and one that now needs addressing by the central banks before it gets out of control.
We are going to look briefly at two specific investment issues relating to healthcare and climate change. The healthcare sector, including the higher return but higher risk area of biotech, has already provided consistently above-average returns for charity portfolios over many years. We believe, however, that the pace of scientific developments will quicken over the years ahead, led by the groundbreaking developments in genomics, thereby offering further potentially attractive returns for long-term investors.
The climate change debate has been raging for many years and will no doubt continue to evolve as scientific and political developments shape the discussion that is rapidly becoming the most important topic of debate. The recent disappointment surrounding COP26 and the continued use of coal by China and India does not detract from the long-term trends that are unlikely to be completely reversed. Overall temperature rises are likely to be restrained to under 1.5 degrees, provided that countries continue with ambitious carbon reduction targets. This is going to provide many opportunities for patient long-term investors who are prepared to commit to these projects, in the same commercial way that the corporate sector is looking to invest capital in these new themes with the hope and expectation of generating worthwhile returns.
Healthcare
The pandemic has been a powerful catalyst for advances in medical research, most notably in the development of mRNA vaccines. We have seen considerable global activity in this sector, which has demonstrated once again the power of human scientific endeavour and ingenuity, leading investors to focus on the long-term attractions of this specialised and must have sector of the global economy.
Rather than injecting a weakened virus into our bodies mRNA vaccines teach the body to make a protein that triggers an immune response, to defend against the viral infection. This vaccine technology potentially has both improved efficacy and safety when compared with the legacy vaccine technologies, as well as providing greater adaptability to protect against many other diseases. This has powerful longer-term ramifications for the pharmaceutical sector, and reinforces and sustains the historical trend of this sector being capable of generating higher margins and higher returns on capital for investors compared to other industrial sectors.
Significant cutting-edge advances have also been made in the field of gene therapy, used to treat genetic diseases, which can be life threatening with few treatment options. Research into gene therapy has been ongoing for decades, but the recent success of a medication for spinal muscular atrophy demonstrates that gene mutations can be treated, opening the door to treatments for other genetic diseases. The targeted and patient-specific nature of these treatments also has significant implications for the sector, investors and insurance companies operating in this field, which suggest that large-scale advances in medicine are now within our reach, which were previously a far-distant, blue-sky hope.
These developments are not without their risks, of course. Overall, however, we believe that they represent good news for global health and create some exciting and potentially attractive long investment opportunities, as these medicines have shown to be safe, efficacious and importantly cost effective to society. For these reasons, we currently have significant exposure to a variety of individual large cap global pharmaceutical stocks, which we believe offer higher potential long-term total returns, along with a selection of more specialist healthcare and biotech pooled vehicles. These latter vehicles may have exposure of up to 100 individual companies, in a portfolio that is actively managed by healthcare specialists, many of whom are medically qualified with many years of experience operating in the sector.
Climate change
Climate change is quite possibly the most important topic that confronts all long-term investors and poses a systemic risk to our investments across all sectors of the global economy. There has been a lot written about this topic. In summary, the hope and expectation is that innovative technology and newly configured eco-systems will most importantly enable mankind to manage climate risks, while offering investors interesting long-term investment opportunities as the global economy moves from a reliance on fossil fuels to other types of energy sources.
This year we have seen an accelerated focus on climate change from all sectors, as well as governments, culminating in the recent United Nations Climate Change Conference, COP26, held in Glasgow. This was a major opportunity for world leaders to accelerate the transition to a decarbonised world. The aim of the conference was to make progress in three key areas;
- Enhanced national contributions, whereby countries could target more ambitious reductions in greenhouse gas emissions.
- A green climate change fund which would require an estimated $100bn, to assist developing countries in adaption and migration practices to counter climate change.
- A global carbon market in which leaders need to agree on the structure of a global carbon market, with international trade between countries.
When the conference ended the consensus view was probably that the disappointment over China and India’s continued heavy reliance on coal is balanced by the commitment from the rest of the global economies to move steadily to a shared goal of keeping the rise in temperature to no higher than 1.5 degrees above preindustrial levels. There certainly remains a lot of negotiation and hard work to be done and some detailed cost analysis to ensure that bold promises can be translated into meaningful policy actions that are not delivered at too high a cost for the end-consumer.
Otherwise, there has been a rise in net zero greenhouse gas (GHG) emission commitments made by corporate and financial institutions and in the US, President Biden’s first executive order addressed climate change. In the UK, an ambitious target of cutting emissions by 78% by 2035 relative to 1990 levels would bring the UK more than three-quarters of the way to net zero emissions by 2050. A net zero world will be hard won. When the pandemic caused the global economy to shut down in 2020, global GHG emissions only decreased by around 6%. Limiting global warming to 1.5 degrees, as set out originally in the Paris Agreement and which has been confirmed as the overall aim of COP26, will require a 6% decline every year until 2050. This is not easy to deliver, both politically and economically, and will entail significant costs that eventually have to be borne by a combination of government and the consumer.
We have already made a number of investments looking to generate commercial returns from activities that benefit the environment, such as reducing emissions from power generation activities, conserving scarce resources, such as water, and making existing companies more energy efficient. We have had investments in alternate sources of energy, such as wind and solar, for some time. More recently, we have started to invest in companies that are making the transition to new and greener sources of energy, including the existing automobile manufacturing and other component companies that are heavily involved in investing in electric vehicles.
Some of the existing global oil companies are redeploying their balance sheets into new and cleaner sources of energy compared to their existing oil-based portfolio and paying out a 4% yield along the way. These type of companies can be suitable investments for those charities that can accommodate this bridge to the new energy world that lies ahead.
Robert Alster is chief investment officer at Close Brothers Asset Management
Charity Finance wishes to thank Close Brothers for its support with this article
