Demographics, research and innovation, and favourable government actions are all creating opportunities in the health-care sector, says Bernard Chua, a vice-president with American Century Investments.
"The aging demographics in the U.S.," says Chua, "as well as overseas, especially in emerging markets, is going to be a driver to improvements (in growth) for a lot of health-care providers."
Based in New York, Chua is a client portfolio manager who represents the investment strategies of American Century's global and non-U.S. portfolio management. The company sub-advises various CIBC Asset Management funds, including Renaissance Global Focus. In recent years, the fund has typically held 15% of its assets in the health-care sector.
Based in Kansas City, American Century was founded in 1958 by Jim Stowers, who together with his wife left a legacy of dedicating a large portion of company earnings to funding life-saving research.
The Stowers' vision of "profits with a purpose" lives on, says Chua. More than 40% of the firm's profits are distributed to an endowment that supports the Stowers Institute for Medical Research and BioMed Valley Discoveries. Since 2000, total dividends distributed to the endowment have exceeded $1 billion.
Along with the needs and demands of an aging population, Chua says four other factors are providing the framework for sustainable growth opportunities in health care.
To start, scientific advances continue to improve our understanding of how cells function and create new advances in health. A leading example of this is in the promising field of immuno-oncology, which seeks to use a human being's own immune system to combat certain types of cancers. "As investors, we think this is very exciting," says Chua. "The market could easily be as big as US$25 billion."
Representing this new branch of treatment is the holding company 
Bristol-Myers Squibb Co. (BMY). "We feel that Bristol Myers is one of the pharmaceutical companies that have a strong pipeline of immuno-oncology drugs," says Chua.
Secondly, technological advances have also made meaningful contributions to the health-care sector. Advances in robotics and patient monitoring are improving efficiencies in the field, says Chua. In addition, medical devices are benefiting from new technology by allowing for smaller, cheaper, more functional products. For example, the fund holds companies such as the Danish company GN Store Nord. The company has recently introduced hearing aids with Bluetooth and Apple iPhone connectivity.
Legislative change has increased demand for health-care services, particularly in the U.S. Chua says the enactment in the U.S. of the Affordable Care Act provides opportunities for health-care-related businesses. Individuals are now required to have health insurance, and those who can't afford it are eligible for government subsidies. The American Century team believes that businesses such as hospitals and drug distributors also benefit from such legislation.
Another driver in the health-care sector is regulatory changes. Regulators are increasingly focused on providing the right medications and treatments for the right patient population. For example, says Chua, if someone has multiple sclerosis, medical practitioners don't just give a patient a one-size-fits-all MS drug, as in the past.
American Century's stock-selection process, says Chua, involves seeking situations "where we see a catalyst that's leading to an inflection point in a company's revenues, earnings, and fundamentals."
Roche Holding AG (RHHBY), for example, a top holding in the fund, has the tools to develop and customize drugs. "Roche is also very active in immuno-oncology," says Chua, "and they have a new multiple sclerosis drug in the process of being commercialized, which could potentially be a blockbuster as well."
Not all is rosy for the health-care sector. Chua says the pharmaceutical industry is recovering from some very difficult years during which many Big Pharma companies had been trying to deal with patent expirations or competition for other potential replacement drugs. Those changes, along with biotech companies that have the potential to create blockbuster drugs or "fail miserably," contributes to stock-price volatility.
"Volatility comes with the territory, it comes with the business," says Chua. "The health-care sector is very broad, depending on the type of health-care stock you're looking at. You really have to understand why you believe the growth story can be sustainable, by understanding the operating risk of the companies, the product offering, and the drug pipeline."
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