Market downturn, market opportunity: Milford's aggressive manager likes these stocks

The fund fell 5.7% in June. The fund fell 6.1% in June. 

Milford Asset Management’s June monthly review makes for queasy reading if you haven’t stopped looking at your fund altogether, with the fund manager reporting that despite adopting defensive positions and holding more cash it was difficult to avoid negative performance across its funds.

Stephen Johnson, portfolio manager for Milford’s aggressive fund, says while “it’s very scary in the eye of the storm” for investors, the Global Financial Crisis was far more terrifying because even bank deposits were at threat “in some of the best banks in the world”.

The current scenario, Johnson says, is a stimulus effect: we’ve had too much stimulus through monetary policy and government spending, and “the size of the problem hasn’t been as big economically as everyone thought it would be”.

“You’ve just got to be patient,” Johnson says, “because over the balance of the year I’m expecting inflation to cool as growth slows. Banks are aggressively hiking rates and that will cool off demand, and then reach a new equilibrium with demand matching supply again.”

Johnson says it is in the gloom of a market downturn when the best opportunities arise - and he’s excited about two sectors in particular, med tech and animal healthcare.

He says med tech and animal healthcare are benefiting from a number of tailwinds.

Johnson says the number of pets globally is rising quickly, particularly in the US, but also in a number of emerging markets.

New Zealand has always been a nation of pet owners, with the 2020 Companion Animals in New Zealand report finding nearly two-thirds of households had a pet and more than half of the households in New Zealand that didn’t have one would like one. There are an estimated 4.35 million pets in New Zealand.

In the US, American Veterinary Medical Association data has 57% of US households owning pets, but a more recent report from the American Pet Association estimates that number rose because of the covid pandemic to an “all-time high” of 70%.

“The whole thing is humanisation,” Johnson says. “We’re treating them like small members of our family. And what that means is its driving a spending boom. If anything happens like an illness, because we’re treating them like our children, you’re more than happy to go to the vet and do whatever it takes to cure your pet.”

Johnson points out Idexx, which makes diagnostic and software products for the industry, as an example of a business riding this “strong growth outlook”, and Zoetis, an animal medicines and vaccine maker.

Both these firms are dominant market leaders focused on innovation, Johnson says.

“When things are very uncertain in the short term, economically speaking, you want to focus on more predictable longer-term trends, if they are durable in nature and has a structural tailwind. Pet humanisation and animal healthcare is one of those.”

It’s a similar story in human health. Johnson says the pandemic saw innovation in vaccine technology, and that innovation pipeline holds opportunities for investors.

Milford is holding shares of Intuitive Surgical, which Johnson says is the leading manufacturer in robotic surgery. Intuitive’s Da Vinci robotic system allows for “minimally invasive” surgeries, with a surgeon remotely operating the “arms” of the robot.

“Effectively, what it does is it allows surgeons to see things that you can't, what's not seen by the naked eye. If you're a patient, it leads to better outcomes, so less pain for the patient, less blood loss a quicker recovery.”

Eventually, Johnson says, a specialist in London might perform a procedure on a patient in New Zealand, and much like the iPhone transformed mobile use this technology could similarly change surgery.

“I've been through a lot of different crisis over my time. And one clear trend is that stronger companies always emerge stronger from from any sort of adversity that they have to deal with. So that's what we focus in on. In an uncertain backdrop, the best protection in any downturn is to own quality companies that are dominant and attractive.”