Shorting ageing

Despite coming on top of the latest Markit global sector PMI, healthcare services firms have been targeted by short sellers.

• ETF AUM has passed $1b for the first time this year
• Short interest across the sector stands at 4.3% - over twice the S&P average
• Despite strong growth in business activity, healthcare services firms continue to see high demand to borrow

Every passing year sees the global median age, the effective age across developed countries, continue to climb. Dealing with the cost of an ageing population looks to be one of the key challenges faced by developed countries in the coming decades. This issue will only become more acute as low birth rates and rising life expectancy look to push the developed world’s dependency ratios, the proportion of retirees to workers, ever higher.

As ever in our interconnected economy, one person’s headache becomes a bonanza to a sector offering a potential solution. In the case of the developed world’s growing age crisis, we look at healthcare services firms. The companies offer both explicit services to the aged such as nursing home and dementia care, as well as implicit ones such as pharmacy and hospital care.

PMIs strong

The healthcare services firms have taken the last couple of years in their stride and currently sit on top of the latest monthly instalment of the Markit Sector PMIs. Healthcare services firms responding to the latest sector PMI indicated that April’s business activity expended at the greatest pace in over 18 months, with an output reading of 62.

Looking further back, healthcare firms have proved relatively immune to the recent economic turmoil. The PMI surveys indicate an increase in output for every month save two since the start of 2010.

This resilience over the downturn has had many commentators calling the sector the perfect defensive play, owing to the fact that it offers strong growth and is often backed by government guaranteed entitlement programs which are tricky for policy makers to amend.

ETF inflows strong

The sector’s resilience over the last few years has not gone unnoticed with investors. The five ETFs which track the healthcare equipment and services have seen their cumulative AUM pass the $1b mark for the first time this year. These funds have already surpassed last year’s inflow total, with $345m of net inflows in the first five months of the year.

So far this year, investors have favoured the devices part of the sector, with the iShares US Medical Devices ETF topping the inflow chart with $236m of new assets. The second largest fund in the sector, the US Health Care Providers ETF also from iShares, has seen strong inflows with $34m of new assets.

This bet looks to be a good one as both these funds have outperformed the S&P 500 index since the start of the year.

Short interest persistently high

Interestingly for a sector with such broad potential, demand to borrow constituents of the Healthcare Providers ETF has remained persistently high over the last 18 months. Currently demand to borrow shares in the constituent companies stands at 4.3% of shares outstanding, over twice the average seen in the S&P 500 index. Despite recent buoyant PMI readings, demand to borrow shares has actually picked up 14% since the beginning of the year.

As ever in the medical sector, short interest is concentrated towards small, volatile companies which have failed to live up to analyst expectations over the last few quarters. In fact, the six firms with more than 105 of their shares shorted have an average market cap of $1b, compared to a total of $7b across the 50 constituents.

Presently seeing the highest demand to borrow in the fund is Bio-Reference Laboratories, which has over 23% of its shares out on loan. The company, which provides diagnostics services, saw its shares tumble by a quarter in the closing month of last year after disappointing third quarter earnings.

Also seeing heavy demand to borrow in the sector is Healthways, which offers such products as “Silver Sneakers” which aim to improve patient wellbeing. The firm now has an all-time high demand to borrow after reporting two loss making quarters. Shorts have stayed the course in the last three months despite the fact that the company reported better than expected revenues in the last quarter, which saw its shares rally.

On the large cap end of the sector, all eight companies whose market cap stands greater than $10b have above average short interest.