History tells us it’s futile to make “bets” in your portfolio based on heated campaign rhetoric.
Elections have consequences, but that doesn’t mean everything we hear on the campaign trail will manifest as policy. It’s hard to accurately predict which political party will win the presidency, which party will control Congress and whether the policy agendas of the executive and legislative branches will align. That’s why we think it’s a mistake to make investment decisions based solely on expected or actual election outcomes. Companies that innovate and provide cost-effective solutions to our most pressing medical problems are likely to do well over time. Ultimately, we believe the long-term outlook for the health care sector is positive, though we recognize that the election is likely to be a source of near-term volatility.
No matter the political environment, we seek to own quality, innovative growth companies that are well managed. Individual companies in each sector and industry deal with legislative and regulatory hurdles with varying degrees of success. Even within politically advantaged or disadvantaged industries, some companies fare better than others because of their unique capabilities and opportunities. Making indiscriminate buy or sell decisions based on political expectations or outcomes fails to account for this reality.
The Affordable Care Act (ACA) is one example demonstrating the pitfalls of investing based on political outcomes. Health care remains front and center in this election cycle, and we have 10 years of financial data since the ACA became law in 2010.
Primary goals of the comprehensive legislation included making health insurance affordable for more people, expanding Medicaid and supporting innovation to help lower health care costs. Different provisions of the statute have faced challenges in Congress and state legislatures. The U.S. Supreme Court will hear oral arguments in a lawsuit over the constitutionality of the ACA’s insurance-purchase mandate one week after Election Day on November 10.
Looking back, it was clear the ACA would bring significant changes to insurers, health care providers and pharmacy benefit managers. Yet, in the decade since the ACA became law, health care stocks have outperformed the S&P 500® Index by more than 1.6% annually on average. Some industries have outperformed significantly—Life Sciences Tools & Services, Biotechnology, and Health Care Providers & Services outperformed by roughly 7%, 5% and 3%, respectively, per year on average.1
...the ACA makes a compelling case for ignoring political rhetoric and focusing instead on companies that could deliver innovation and more cost-effective care.
So, avoiding health care stocks over ACA-related fears clearly would have been a mistake. Of course, past performance cannot predict future results, but the example of the ACA makes a compelling case for ignoring political rhetoric and focusing instead on companies that could deliver innovation and more cost-effective care.
We believe it’s unlikely that either presidential candidate will make policy proposals that significantly disrupt the health care sector. Plans seeking to improve the system through modest changes are more likely.
For example, President Donald Trump issued a September 24 executive order titled “America First Healthcare Plan” indicating support for insurance coverage of preexisting conditions (consistent with current law). The directive also mentions efforts on drug price transparency, drug reimportation from Canada, and proposed discount cards for millions of Medicare recipients. Many of these positions have either already been enacted or previously announced, so they don’t entail any meaningful changes to the current health care system.
Nor do we believe Joe Biden’s policy proposals would disrupt the current structure of the health care system. It seems reasonable to expect he would support the ACA and offer the option of buying into a “Medicare-lite” program. Any such policy changes would likely require Democratic control of both houses of Congress.
Accurately forecasting and investing in anticipation of potential electoral changes is hard, and we discourage investors from using this strategy.
We believe quality businesses that are agile and innovative will continue to grow under various environments regardless of which political party controls Washington, D.C.
Because health care is a politically contentious issue, we try to look past the rancor to focus on health care companies’ societal impact and financial returns over time. We believe quality businesses that are agile and innovative will continue to grow under various environments regardless of which political party controls Washington, D.C. In our view, innovative companies offer the potential to create the cost-effective, long-term health care solutions that any policy reforms would aim to achieve.
No matter how the 2020 general election plays out, we expect a broad range of potential consequences for companies trying to navigate regulatory and legislative changes. How different companies maximize revenues and what each does with those cash flows—pays dividends, reinvests in the business, acquires competitors, etc.—largely determines business results. Over time, we believe these factors drive investment success, not legislative or political wrangling.
1Data from 3/23/2010 - 9/24/2020. Source: FactSet.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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