Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, SG Hiscock portfolio manager Rory Hunter reveals the 2 medical tech businesses that are the perfect ballast for small caps during these volatile times.
Investment style
The Motley Fool: How would you describe your SGH Medical Technology Fund to a potential client?
Rory Hunter: I've been running SG Hiscock's small companies fund for about 3 years. And we've had some very good success with that fund and seen strong performance. I've been working with Adrian Di Mattina, who runs the emerging companies fund, which is a micro-cap strategy, so there's a bit of a crossover in the funds. We work in the same team and it's a collaborative research effort.
We've had some pretty decent success in the healthcare space. In addition to that, one of our board members, a lady by the name of Brenda Shanahan, has recently received an Order of Australia for her services, not just in finance, but also to the healthcare industry and academic institutions.
So bringing that all together, and especially with Brenda's network in mind and her expertise, we felt for quite some time that we're better equipped than our competitors to do a specifically focused strategy which addresses the healthcare space.
Obviously, the pandemic came along and we realised that… the healthcare industry has always been amazingly laggard to other industries globally in terms of technological adoption. The healthcare industry has been very, very slow to adopt technology and there's always been a lot of regulatory inertia and a lack of desire amongst the participants to actually change and adopt technology.
We had half-an-eye on the fact that you've got ageing Western world demographics, more ageing demographics in developed economies and the strain that that's actually putting on healthcare services and the healthcare system. You've got the need for healthcare institutions to eke out efficiencies and drive down costs and increase capacity.
The best way for them to do that is to adopt medical technology.
Then obviously there's the advent of the pandemic. About 18 months ago… we took the view that the pandemic had actually acted as our necessary catalyst to get the healthcare sector up to speed with other industries and sectors around the world, in terms of technological adoption.
Australia has always punched above its weight when it comes to innovation in medical technology. The likes of CSL Limited (ASX: CSL), Cochlear Limited (ASX: COH), Resmed CDI (ASX: RMD), Pro Medicus Limited (ASX: PME), Nanosonics Ltd (ASX: NAN) — these are all global businesses, and then you look at the likes of CSIRO [and] research centres of excellence as well.
Australia's just a great place to find good opportunities in medical technology. And we feel that we have the expertise in order to do that. And we feel that moving forward over the next 10 years, this will be the dominant growth rate that's available to global equity investors.
MF: Cynics of the medical technology sector might say those companies have binary outcomes. What would you say to that?
RH: I'd absolutely agree, however, with the caveat that you have to throw biotech companies into that bucket, rather than medtech companies.
It was something that came to us immediately when we launched this strategy, which was the fact that biotechnology companies do have binary outcomes.
And typically those binary outcomes take up to 10 years to evolve. So you've got that time erosion on capital, but they're also very, very capital intensive. They're funding clinical trials, incredibly capital intensive. So the path from drug discovery into the commercialisation of the drugs can take 10 years. And require hundreds of millions of dollars of capital, which highly dilute shareholders who'd been there from early on.
As a result of that, we are predominantly focused on medical technology as opposed to biotechnology. And so it doesn't mean that we won't look at biotechnology opportunities, but we're just far, far more selective. Typically we'll have a skew of probably at least 80% of the portfolio in medtech rather than biotech.
Biggest convictions
MF: What are your two biggest holdings?
RH: The two biggest holdings currently are CSL and Resmed.
It's actually more of a strategic positioning with the macroeconomic backdrop in mind. When we came to setting up the fund, we wanted to set it up with a small companies bias, but [with] the ability to invest across the life cycle spectrum and the ability to hold large companies as well, mainly because we recognised that you get a lot of volatility at this end of the tail.
The small companies, the innovative companies that are in early commercialisation, or at concept phase and who aren't generating cash flows, aren't generating profits.
We wanted to provide some balance to the portfolio. As part of our equities research team, Hamish Tadgell, who runs our high-conviction broad-cap strategy, worked as a healthcare analyst at Goldman Sachs for a number of years. So we recognised that our resources were quite well suited for that as well. So we brought Hamish into the team for this strategy.
Our thinking there is just that there are actually few people on the buy side that actually understand those businesses as well as Hamish does, given his credentials.
We've always said that we'll look at closing this strategy when it gets to about $100 million. And whilst large companies provide us with balance, they also provide us with the ability to shift the weight in between small and larger companies, depending on the macroeconomic backdrop.
We actually had a lot of pushback from early investors, or seed investors, on that front. They said they only wanted exposure to the innovative, early-stage, smaller companies. And we actually explained to them that depending on the macro backdrop, depending on sentiment, it can get very, very turbulent at that end of the market.
It turned out that since we launched this strategy about 6 to 8 months ago, the macroeconomic backdrop had deteriorated. We are thankful that we took that position because, otherwise, it would have been very painful for those investors.
We also feel that the larger companies in this space are exposed to the same tailwinds as those I've already spoken about as well. And so we think that there's still very good growth in these businesses.
