Biotechnology companies are often overlooked by investors due to the complex and often risky nature of the industry, but Horizon 3’s Matt McNamara believes they provide a valuable diversification opportunity.

Speaking to Reach Markets, Mr McNamara noted the oft-maligned sector is effectively “recession-proof” because demand for its products and services doesn’t diminish when the economy hits rougher patches.

“People still get sick, populations are getting older and there are large populations like India, Indonesia and China that are moving from third-world to the first-world and they want the best treatments,” he said. 

“It’s booming, the sector, and obviously of late – during the last 20 months – people are concentrating more on their health than they ever have before because we’re all so conscious of this pandemic.”

Mr McNamara added that approximately 14% of Australia’s GDP is spent on healthcare, and in the US this figure is closer to 17% and quickly climbing to one-fifth.

And while it’s good practice for investors to keep a diversified portfolio which reflects the environment in which the money is being invested, few investors can honestly claim to have a similar portion of their portfolios made up of healthcare names to match the scale of the sector in the economy.

Though Mr McNamara believes biotechnology companies play a useful role in diversifying portfolios, he said it would be “silly” for people to try picking their own stocks without having access to a range of expert scientific opinions.

Within Horizon 3, the investment committee consists of seven people with a range of expertise across scientific and business fields, covering everything from drug evaluation, clinical trials, and pharmacology to business development and analysis.

And in instances where no-one on the committee has personal knowledge of a matter, Mr McNamara expects it would take no more than two phone calls to speak with someone who does due to the committee’s deep and comprehensive network of contacts.

Focus on the Achilles Heel

This same network provides Horizon 3 with a steady supply of new investment opportunities. Mr McNamara estimated that 500 potential investments cross the fund’s desk in a calendar year.

Rather than conduct full due diligence on each of these – something Mr McNamara said isn’t reasonable given the volume of opportunities presented to himself and his team – the investment committee utilise a technique they refer to as the “Achilles Heel approach”.

“Because we’re experienced in hearing pitches, we start off with a very negative attitude straight away and try to see how we can trip it up,” he said.

This doesn’t mean distracting presenters or being rude, but when a member of the committee hears or sees something they think could be a deal killer, they will probe a company on that issue more heavily.

If the company’s response is inadequate, Horizon 3 won’t waste any more time on it, but if the company successfully explains its position then it will go through to an initial due diligence – effectively rooting businesses out by pressing their weak points, to see how they hold up.

Roughly 100 companies make it to this initial due diligence phase, with only half then going on to the full due diligence process.

Mr McNamara recently joined us for a special biotech edition of ‘The Insider: Meet the Fund Manager’, where he will discuss his 3 favourite stocks, his approach to investing and his market views and insights. Watch the session replay here.

‘The Insider: Meet the Fund Manager’ is a free webcast series which gives you direct access to prominent fund managers. This session is live and interactive and includes a live Q&A. Spots are limited, so please book into this session as soon as possible.

Sources:

• The Motley Fool: 5 Reasons to Hate Biotech Stocks

Reach does not assume responsibility for the accuracy or completeness of any information provided, and the views expressed are not reflective of Reach Markets position. Any advice contained within this presentation is general advice and does not consider your personal circumstance, you should consider whether it’s appropriate for you. The information we are giving you is for educational purposes only. “Investing is about understanding your risk” and every time you invest in the share market there is a risk of loss.