The ridiculously simple way to grow rich and smash the ASX200

Can you afford NOT to own ResMed Inc. (CHESS) (ASX:RMD) and Cochlear Limited (ASX:COH)?

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The numbers don't lie.

If you really want to beat the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) and grow your wealth there is only one game in town; healthcare.

Yes, boring old healthcare.

Healthcare is bigger than Ben Hur and if you have ever questioned the need to have strong exposure to ASX-listed healthcare companies in your portfolio, this should quickly change your mind.

According to Deloitte, global healthcare spending was estimated to be worth US$7.2 trillion dollars – 10.6% of global GDP – in 2013. In relatively prosperous Australia this percentage jumps to 11.4% of national GDP.

Forget the rampant media focus on glamour industries like iron ore and banking, 11.4% of national GDP is utterly mind blowing stuff.

On steroids

But if the scale of healthcare spending is big, it is nothing compared to the performance of the big healthcare stocks over the last five years.

Just take a look at the below comparison of the S&P/ASX 200 to the S&P/ASX 200 Health Care Index (Index: ASX: XHJ):

150717 RP - ASX200 Healthcare

Source: Google Finance

Over the last five years the steroid injected S&P/ASX 200 Health Care Index has trumped the returns of the S&P/ASX 200 by over 100 percentage points, with annualised returns of over 20%!

The S&P/ASX 200 Health Care index is made up of 18 companies including big names like ResMed Inc. (CHESS) (ASX: RMD), Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL).

The strong returns extend to the additional eight companies included in the S&P/ASX 300 Health Care Index, with annualised returns over the last five years of 19.35%. But given the growing demand for healthcare products and services, a similar above-average trend is likely to reach down to the small-cap depths of the All Ordinaries Index (INDEX ASX: XAO).

Too expensive?

There is a well-founded perception that healthcare companies are expensive. In a relative sense, when compared to the broad S&P/ASX 200 Index, this is certainly is true.

The recent trailing price-to-earnings (P/E) ratio for the S&P/ASX 200 Health Care index is 26 compared to just 16.5 for the S&P/ASX 200 Index.

Meanwhile, dividend yields for healthcare also trail at a stingy 2%, compared to 5% for the S&P/ASX 200.

This is not to say healthcare companies are overvalued. The industry is booming and unlike many sectors has a clear, sustainable growth outlook over the next decade.

In 2013 14% of Aussies were aged 65 or older. According to the Australian Bureau of Statistics this will jump to 22% in 2061, pushing one of the key markets for healthcare products far higher and accelerating the demand for healthcare locally.

This trend is similar for developed countries around the world. As people age, it is only natural that spending on quality of life should come ahead of discretionary spending, every time.

This supports the likelihood of continued above average earnings growth for healthcare companies which will naturally command above average share prices relative to earnings today.

Low dividends allow reinvestment back into assets and research and development to ensure companies can keep up with growing demand and compound returns at high margins.

And boy, are margins high! CSL reported Group EBIT (Earnings Before Interest and Tax) margins of 29.7% in 2014, while Primary Health Care Limited's (ASX: PRY) medical centre business had a ridiculous average EBITDA margin of 56.8% in 2014.

A tick in every box

Still not convinced?

Healthcare stocks are not only growing at unparalleled rates and earning huge margins, but big companies like ResMed, CSL and Cochlear also have strong globally diversified earnings. This lowers geographic risk and amplifies returns from major currencies which are currently smoking the Aussie dollar.

The tailwinds of growing wealth in countries like China and India is only trumped by the natural tailwind of aging populations mentioned above.

Add to this this cross pollination of an industry supported by both public and private demand and we have an essential, defensive, growing, high margin and all-round formidable investment opportunity.

So let me ask you; can you afford NOT to have exposure to ASX-listed healthcare companies?

Motley Fool contributor Regan Pearson has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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