An ounce of prevention is worth a pound of cure

27-03-2017 | Interview


This year, the RobecoSAM Sustainable Healthy Living Strategy celebrates its 10-year anniversary. Together with the Strategy’s portfolio manager, Moritz Dullinger, we explore the uniqueness of the Strategy for investors and why its approach to spiraling healthcare costs is as relevant today as it was a decade ago.

What factors were behind the development of the Sustainable Healthy Living Strategy?

We came up with the idea of launching a dedicated investment strategy focusing on health promotion back in 2007 driven by mounting evidence of a global obesity pandemic. With dietary habits rapidly shifting towards convenience-driven eating, fast-food and soft drinks as well as the trend towards less physical activity, our research recognized the potential of initiatives towards a healthier lifestyle.
Discussions surrounding measures to combat exploding healthcare costs centered around a growing number of companies that offered specialized solutions for better food, more physical activity, increased food safety and improved diagnostic analysis.

"Creating a portfolio of companies that promoted healthier living and effective prevention measures presented a compelling alternative to traditional healthcare funds that focused purely on the illness and treatment of disease."

What makes the RobecoSAM Sustainable Healthy Living Strategy attractive for investors?

The Sustainable Healthy Living Strategy aims to achieve attractive, risk-adjusted, long-term returns via a portfolio of overlooked and undervalued high-quality stocks. As a thematic strategy it is focused on a diverse range of companies that provide products and services focused on the prevention of chronic disease—the main driver of escalating healthcare costs. The diversity of companies and preventative approaches offers an attractive combination of defensive characteristics while at the same time significant opportunities for outperformance—all with low volatility.
For outperformance, innovation is key. From the rapid adoption of simple technologies like mobile e-health apps and wearable devices to the more sophisticated molecular markers and genetic sequencing that come from biotech and pharmaceuticals, healthy living companies are developing products with significant growth opportunities. At the same time, the Strategy focuses on steady growth coming from stable consumer staples companies whose nutritional food and basic health products support general health worldwide. These market segments have strong growth prospects especially within emerging markets where a growing middle class has more education and more income to spend on health and well-being products.
For sustainably-minded investors, the Healthy Living Strategy provides an opportunity to align their values with their investments. It focuses on companies that are creating value as they address the challenges of keeping society healthy and productive.   

As a portfolio manager, what initially interested you in healthy living as an investment theme?

I was a competitive athlete in my late teens and so needed to stay healthy and fit in order to perform. As an athlete you are more aware of how critical good health is for performance.  Lifestyle factors like sleep and overall fitness are important, but good nutrition is the decisive differentiator between good results and competitive performance.
My interest in health went from leisure to profession when I started my career as a healthcare analyst in an equity brokerage firm. There, I strengthened my knowledge of healthcare at the company and sector levels learning first-hand how to analyze complex healthcare business models and as well as further sharpened my skills in discovering undervalued investment ideas. Furthermore, at the macro level I gained a deeper appreciation for the enormous impact the healthcare industry has on a nation’s economic productivity.
I joined RobecoSAM initially as a healthcare analyst and am now a portfolio manager responsible for the Healthy Living Strategy.  I use my own passion for healthy living as fuel for spotting trends and developing insights into the healthcare market.  

What distinguishes the RobecoSAM Sustainable Healthy Living Strategy from similar investment funds?

The RobecoSAM Healthy Living Strategy is unique in the universe of healthcare equity and thematic investment funds in two distinct ways.  First, it has a specific focus on a particular societal burden, the so called “lifestyle diseases” like stroke, heart disease, diabetes and cancer which are largely caused by unhealthy lifestyle choices. Second, we don’t invest in companies that merely treat chronic diseases but rather center our investment approach on identifying companies that prevent them. Our prevention arsenal includes four investment clusters: healthy nutrition, activity, personal hygiene and the efficient diagnosis of lifestyle diseases as the means of attacking the causes of rising healthcare costs.

"Through our stress on prevention, we target companies with sustainable business models that are part of the solution and not the problem."

Our investment philosophy is based on the core belief that sustainable companies will outperform their peers in the long-term. We collect, analyze, and integrate material ESG information into our fundamental investment approach. The result is a concentrated portfolio of companies with solid financial fundamentals at attractive valuations relative to their intrinsic value.

How does the Strategy support healthy living in society?

The Healthy Living Strategy builds on the power of prevention to support and maintain healthy populations. Studies prove that healthy choices made early and often can protect against disease later on.  From the consumer side, positive trends in fitness and nutrition are showing that individuals are increasingly realizing their role as stakeholders in shaping their own health and well-being. The Healthy Living Strategy invests in companies that encourage the individual’s investment in health. Whether through yoga apparel, fitness studios, wearable sports bands, they provide products that increase the motivation and lower the costs of maintaining good health.

Healthy living among high-income economies is one thing, but how does the Strategy support healthy living in low to middle income countries?

Addressing the root causes of poor health is an abiding sustainability theme, whether in developing or developed countries. The Healthy Living Strategy broadly addresses the United Nation’s Sustainable Development Goals of Zero Hunger (SDG 2) as well as Good Health and Well-Being (SDG 3).  

SDG_2-3_de.jpg | IMAGE

With the help of nutritional science, healthy living companies are addressing the dual-issues of food insecurity and food quality, re-engineering food to reduce bad stuff like salt, sugar and trans-fats and fortifying it with good stuff like potassium, folic acid, and iron. 
The spread of infectious diseases is also a very relevant topic in emerging countries. Here too, Healthy Living companies are providing markets with household basics like low-cost soap, toothpaste, disinfectants, and cleaning products—simple but effective solutions to reduce the spread of infection.  Companies are combining their scientific know-how with their marketing savvy to publicize and educate consumers on the critical connection between nutrition, hygiene, and health. 

"You can’t have a healthy economy without a healthy population—so what’s good for health, is good for business."

What are the profiles of the companies in which you invest? What makes an attractive valuation for you?

We like businesses with high returns on capital, sustainable competitive advantages, clean balance sheets, and solid market shares in healthy industries. The analysis of material sustainability information helps us to determine the underlying quality of the management team and the business model.
Stocks often react to emotion over the short-term but trade toward intrinsic value over the long-term. We look exactly for the mispricing resulting from this short-term over-reaction and try to buy these high quality stocks at a discount to our intrinsic value estimate which is our margin of safety.
In order to make better informed investment decisions, it goes without saying that you need a keen understanding of companies’ business models as well as the industry (-ies) in which they operate. Despite all the cognitive biases and emotional overreactions, in many cases, the market is correctly evaluating the risk / reward profile of various investment opportunities; but you can’t deliver superior returns unless you do something different than your peers.
Our investment process helps us to perceive market information in an unbiased light, maintain a truly long-term perspective with a strong focus on business fundamentals, and search for overlooked and under-appreciated investment opportunities.

"We look for mispricing and consequently in most of our high conviction investment cases there is a contrarian element."

“Contrarian” doesn’t necessarily mean that we completely disagree with the market perception or that the share price is under significant pressure. It simply means that the market fails to understand the competitive positioning of a business model in the long run. Sometimes companies face temporary but fixable problems that overshadow their true, long-term earnings’ power or are just out favor. We have a bottom-up, research-driven investment process and do extensive primary research to reduce the risk of buying too early or investing based on faulty assumptions. It certainly helps to have the long-term view of Sustainability Investing undergirding our approach, and we appreciate that our clients have the same mindset.

How do you distinguish fads from long-term "health trends"?

We believe it is important to view trends from the customer’s perspective. Whether short-term fad or enduring trend, companies that develop value-creating products and services for society have a right to exist and will continue to draw revenues with their business models.
It is always tricky to decide on a fair earning’s multiple for trendy, high-growth companies.   Sometimes it is tempting to buy when you find a stock with a capable management team that delivers high sales growth rates with expanding profit margins. Companies invest a lot of money preparing to enter or develop new high growth markets and certainly benefit from the first-mover advantage. Yet, we also believe that too many investors are prematurely thrilled by growth prospects and early gains and only focus on the industry’s barriers to entry too late in the game—when competition arises from other firms. Will the company be able to maintain their market share and profitability when larger corporations enter the market? What will happen to product pricing when nimbler companies come along? We are long-term investors and our ultimate goal is to protect our client’s capital and avoid trendy but high-risk growth stories, no matter how tempting the profit prospects or seductive the headlines.  

What factors have influenced performance (positive and negative) of companies in the area in the past 3-5 years?

The Healthy Living investment universe is dominated by companies that benefit from structural growth tailwinds and offer strong, free cash-flow generation. Besides valuation and sustainability considerations, we believe the main performance driver is a shareholder-friendly capital allocation strategy. We prefer companies that reinvest their cash flows internally into new projects that deliver high returns on capital or companies that pay dividends. We avoid stocks with management teams who engage in “empire-building” and consistently overpay for M&A deals that destroy shareholder value.
Another important consideration is the company’s competitive positioning. We evaluate a business’ competitive advantage to understand its sustainable earnings power over a long-term horizon. The market tends to underestimate competitive forces and, over the last few years, lots of highly regarded companies have turned into fallen angel stocks.

What are some dominant trends in consumer behavior across the healthy living theme?

I think the most dominant trend is the emergence of a more educated and motivated consumer. Consumers are using medical websites, social media and blogs to learn and exchange information on all aspects of health including nutrition, diseases, fitness and well-being. User-friendly platforms have made it convenient, accessible, and even fun to lead a healthy lifestyle.
This has led to subsequent trends that are also having an impact on healthcare innovation and delivery like the always-on consumer. Information flows that started with heartbeats per minute, steps per day, and calories per meal, could rapidly evolve into implantable smart chips that measure, diagnose and treat early signs of chronic disease. 
As health insurance coverage is hotly debated it seems clear that consumers will in future bear more out-of-pocket expenses.  

"Healthcare service providers will need to borrow from the playbooks of retail-driven industries to devise ways to leverage opportunities like online shopping and convenience-centered delivery."

The internet of things and the digitization of medical records and individual consumer health data will facilitate this process. The winners will be those who can harness “Big Data” to create new business models that create better products, better treatment and better health for the individual and society.

Which Healthy Living products do you use on a regular basis?

I still use the old Adidas* weight lifting shoes which I bought roughly 15 years ago for use in numerous competitions. I own Asics running shoes, and wear mainly Adidas sports apparel, for little more reason than I wore them as a child and I like the quality of the product;  it seems that I am a good example of customer loyalty.
I am a member of a good gym right next to our office which is very convenient. It’s equipped with Nautilus* strength equipment and Technogym cardio equipment. Nautilus sells very innovative adjustable dumbbells called "Bowflex Select-tech" which I bought last year for my small home gym. I investigated Fitbit’s line of fitness trackers but didn’t like the fact that they aren’t waterproof, so I bought a Polar (private company) device instead.
It gets trickier on the healthcare side as, I don’t need to take medication, but when I have a cold, I use Sanofi* and Perrigo non-prescription medications. I am near-sighted and use Cooper contact lenses and have glasses with Essilor, a leading brand in optical lenses.
As far as nutrition goes, I really like Danone's* dairy offering, especially their Alpro soybean-based brand. I used to buy Glanbia protein powder but switched to a private label whey protein. From time to time I cook at home and try to use less salt, so I have various McCormick spices at home. I also like Fresh Del Monte's canned peach halves—they taste great and come with a very long shelf life. When it comes to hygiene, I use Colgate toothpaste and an electric Phillips toothbrush. I use Unilever's Axe* anti-perspirants and Procter & Gamble shampoo.
*Disclosure: As of the time this interview was conducted, March 2017, the RobecoSAM Sustainable Healthy Living Strategy held these named securities.