Over the last 30 years, the two best performing sectors within the MSCI World Index have been Information Technology and Healthcare, each returning 12.2% and 9.6% annualised (source: Bloomberg, as at 31 March 2026), vs 8.6% for the MSCI World Index (30 years to 31 March 2026).

These two sectors make up the largest weight of the Goodhart Global Future Leaders fund, as here we find highly innovative, fast-growing companies that can genuinely dominate their niches over the long term. Whilst we still see scope at a stock level for outsized returns from stocks in these sectors, some of the persistent drivers over the long term are changing, within Healthcare in particular, which means a one-sized fits all approach no longer works.

The last 30 years vs next 30 years

For the last 30 years, healthcare investing has largely been a play on aging demographics combined with pharmaceutical breakthroughs, driving healthcare budgets to grow well in excess of GDP. Per capita healthcare spend rises exponentially with age, and so demand growth has outstripped wider population growth as the baby boomers reached their years of peak consumption. Great democratization of healthcare has driven adoption further.

On top of this, pricing has far outstripped inflation, driven by myriad innovations introduced over the same period, combined with the introduction of middlemen to the value chain. These innovations are priced higher than the current standard of care, reflecting the superior outcomes they deliver. As a result, healthcare spending has grown from less than 7% of GDP in 1970 in the US, to c13% in the 1990s to c18% in 2024 (Source: KFF). The spend has also grown outside the US but not to the same level.

Over this period, owning  the index proved a reliable way to gain exposure to  this demographic trend, supported by the relative defensiveness of healthcare spending during economic downturns.

The current trajectory is unsustainable

In most parts of the world, governments play a central role in providing a safety net, democratising the cost of healthcare, amongst other things. If you are unfortunate enough to have an illness that is expensive to treat, this cost is ultimately shared by everyone even though the treatment is concentrated on a few: In the US, the top 1% of adults with the highest health spending account for c20% of spend, with the top 5% of population account c49% (Source: KFF).

There is an implicit social contract in which individuals are net contributors to the public purse during their working lives, before becoming beneficiaries in retirement. At retirement, income tax receipts cease and are replaced with pension entitlements combined with burgeoning health and social care expenditures, which rise sharply towards the end of a person’s life. In the US, KFF estimates that the 65+ cohort account for 38% of total healthcare spending despite accounting for only 18% of the population.

We are now in a situation where the demographic headwinds facing many countries combine two harsh realities that need to be overcome which breaks down the formula for paying it forward:

1. A shrinking workforce now needs to pay for a growing elderly population which is a fiscal drain. More of the workforce is working in health and social care as well, with the sector adding 682k jobs in the US 2025 vs only 116k for the broader economy (source: Bureau of Labor Statistics).

   
   

2. On a global level the number of people of working age per 65+ year old has dropped from roughly 9 to 6 in the last 30 years, and is forecast to drop to below 4 by 2050 (Source: UN). This decline will be more acute in countries facing a steeper demographic cliff, such as China where the ratio will drop from 4.5 currently to roughly 1.5 in 30 years. Whilst this was manageable in the past, when interest rates were close to zero, we are now in a situation where debt levels are too high to run such ballooning deficits.

Given this fiscal constraint, we think the next 30 years of healthcare will look very different to the last 30, as the world cannot afford to fund the same growth, even if demand remains. Demographics, whilst driving volume growth as the population continues to age, face too big a headwind from a shrinking workforce, at a time when government budgets are dealing with higher interest costs and increased defence spending. Healthcare spending cannot outstrip GDP growth ad infinitum. Something needs to change and we think it will.

Given this backdrop, we think the winners in healthcare will come from driving efficiencies in the system, rather than a broad attempt to expand the overall pie. Companies that can come up with innovative new products that see rapid adoption and save cost for the entire healthcare ecosystem, despite retaining profits for themselves, are going to be the real beneficiaries, in our view. Those trying to expand the pie and monetise friction in the value chain may face more difficulty.

Breakdown of current healthcare spending

Given the prominence of pharmaceutical companies in media coverage – particularly in the US - one might assume that drugs represent the biggest component of healthcare spending. However, this is not the case. A study by IQVIA across 12 major economies found that drug spending accounted for an average of 15% of total healthcare spending in 2022, ranging from 9% (UK) to 20% (Japan), with the US at 15%. While per capita drug spending is higher in the US due to elevated prices – and overall healthcare spending as a share of GDP exceeds that of other countries – pharmaceuticals are not the primary driver of total healthcare.

Focusing on the US, given that is where most of healthcare profits arise, overall the lion’s share of health care spend goes into hospitals, alongside physician and clinical expenditures. It is therefore key to target these two areas to drive the most incremental savings and drive productivity gains that can lead to better outcomes for the same cost. Providing innovative technologies with positive healthcare economics can help drive down healthcare costs for hospitals, whilst digital technologies typically reduce some of the administrative burdens, which McKinsey estimates at c25% of overall spend (Source: Administrative simplification: How to save a quarter-trillion dollars in US healthcare), with technology acting as a deflationary force. Improving labour productivity is key, especially given high salaries for skilled staff.   

Current macro environment and subsector breakdown

The healthcare sector performed well during the Covid pandemic, with strong demand growth and record biotech funding, which led to ballooning investment across the space. 2023 onwards has seen a number of years of weakness here, with a soft biotech funding environment and destocking across the supply chain, compounded by concerns around drug pricing in the US and questionable policy initiatives from US government bodies leading to funding cuts and hesitation from many pharma companies to spend. This has led to the sector becoming out-of-favour, providing an excellent moment to be contrarian.

From a bottom-up perspective, the sector is diverse, spanning a broad array of companies serving different needs across the healthcare continuum. Ultimately, we are looking for Future Leaders, which drives a highly selective approach to sub-sector allocation. We are looking for fast-growing companies with the potential to achieve strong profitability and long-term market leadership – businesses that control their own destiny and give us confidence in our forecasts.

As a result, not all subsectors provide fertile hunting grounds, and our views are as follows:

Biotech

In a similar manner to an oil company drilling a well and hoping to strike black gold, we stay away from the biotech industry. Whilst upside from clinical success can be substantial, the downside risk is significant,  and outcomes are too binary for us to develop a meaningful edge. In our view this is a space much better left to specialists, or to large pharma companies to acquire as they continue to essentially outsource their R&D rather than develop in house. Overall, returns on R&D investment are modest once the cost of failures is taken into account.

Pharma

Whist pharma is less risky than biotech given less concentration risk from singular assets, we tend to shy away from sector, given the stars are rarely aligned for all assets to be outperforming in sync. Patent life remains an issue, which can weigh on valuation in the long term, with companies forced to continually reinvent the wheel, whilst pricing remains under the crosshairs for all payors. Competition is fierce and long-term market share dynamics are difficult to predict, unless within a small niche. Internal R&D productivity tends to be mixed, and hence many pharma companies prefer to buy late-stage biotech assets, and drive incremental value through distribution and commercial know how.

Healthcare Equipment & Supplies

Medtech is a key area of focus and source of Future Leaders. Margins are typically high, organic growth well above GDP, and product cycles can drive tangible revenue acceleration and provide a differentiated view to consensus. Importantly, patent cycles are less of an issue here vs pharma, once a technology is adopted. Medtech companies can also ride the success wave of pharma and biotech and provide equipment used in the manufacturing of complex drugs, such as in GLP-1 manufacturing.

Orthobiologics is one area of the market where we have outsized exposure (we view these companies more as Medtech rather than their often-outdated GICS classification). Here we find companies that have recently introduced new and innovative products, with high gross margins (typically >80%) and low penetration into the overall market (<10%), but which are seeing strong adoption from leading centres and key opinion leaders that gives us confidence that penetration will be much higher longer term. Importantly these products are better than the current standard of care even at a higher price point, given they often reduce the wider cost hospitals must bear: reducing the time a patient stays in hospital, which is expensive, or by reducing the chance of revision surgery. In many cases, EBITDA margins remain low as these businesses have yet to fully scale their operating cost base. However, with double-digit organic growth, we see potential for operating leverage over time, with margins capable of expanding materially from current levels. Smaller-cap companies, where a single product can drive the majority of economic profits, are excellent candidates to become Future Leaders. Unlike larger, more diversified businesses, this allows us to build high conviction by forecasting adoption of the key product with greater accuracy and developing a differentiated view versus consensus. Longer term these business may struggle to remain public as larger companies look to bolster their portfolios and boost their weighted average organic growth.

Healthcare Providers & Services

We find fewer Future Leaders within the service providers and insurers, given many companies are broader plays on the industry growth rather than having a unique product or service. Here companies tend to have lower margins and lower growth, and are often price takers rather than price setters.

Life Science & Tools

Providing the picks and shovels into the pharma industry can be highly profitable, and can benefit from the upside of pharma success without the binary risk with a diversified portfolio approach, with many Life Science players serving all pharma customers. Here, exposure to higher growth treatment areas can be gained, with regulatory lock in securing future volume growth once any clinical asset advances through to commerciality. Instrument placements drive high margin consumable demand that provides a sticky business model with great visibility. From a stock picking perspective, in the small and mid-cap space, individual product launches can drive tangible revenue acceleration at a group level and so provide a fertile hunting ground for ideas.

Healthcare Technology

There are numerous digital players across the healthcare value chain, ranging from providers of software that support pharma companies across functions - from R&D to sales and marketing – to solutions used in hospitals and other healthcare environments that power machines and facilitate daily operations. Healthcare Technology operates as many other vertical market software firms, and given the size, strength and inefficiencies in its customer base, we see the strong potential here. Importantly, many of these technologies are mission-critical and deeply embedded into workflows, making them essential to day-to-day operations. Combined with years of accumulated data, this creates high switching costs and makes displacement by internally written tools or AI native start-ups unlikely. Given that the healthcare industry is generally cautious to adopt new technologies in many cases (e.g. the NHS still uses fax machines), alongside concerns about data security and privacy, we see a long runway for growth.

Whilst historic returns in this subsector have been poor (c3% pa over the last decade), this reflects the subsector industry concentration by MSCI, which currently includes just 3 stocks with a 75% allocation to the largest, Veeva, 13% to Pro Medicus and 12% to M3 (Source: MSCI, as at 31 March 2026). In our view this index misses out a huge number of highly innovative technology companies that are selling into the healthcare end market, which have the capability to scale to become dominant in their niches - ideal candidates for Future Leaders. Given the digitisation and productivity improvements the healthcare industry needs to find, we view this a key area of exposure, and a solution to the problem.

Many healthcare technology stocks have performed poorly in the last 6 months, selling off along with other SaaS businesses, compounded by a slowdown in discretionary pharma spending growth in advertising which funds some business models. We see the SaaS sell off as overblown (see our article on AI, SaaS and the Mispricing of Durability), with any slowdown temporary in nature and unlikely to disrupt long term potential.

How will AI disrupt healthcare?

Artificial intelligence has the potential to massively disrupt and reshape the healthcare market, and is already a major focus for the AI labs given the sector’s large share of GDP and substantial addressable market opportunity. The healthcare industry is rife with data that can be harnessed, and in many cases remains under-monetised. Early success from AI has already been witnessed with the power of Google DeepMind’s AlphaFold even before the release of ChatGPT, and its ability to map protein structures leading to Demis Habbis sharing the Nobel Prize. In many cases though, companies have been using AI for many years in their own machine learning to optimise processes, but with the advent of LLMs this can go further. Ultimately technology is a deflationary force that should be harnessed for good and can reduce some of the inefficiencies across the industry. RoI will ultimately drive adoption in an industry that is typically cautious, particularly given concerns around data security.

In Pharma & Biotech, AI will have the ability to find treatments that previously were unknown, speed up clinical development timelines, reduce the cost of failure (by increasing probability of success), and allow more of a drug’s life under patent to be generating commercial revenues. Whilst a degree of the benefits will accrue to the pharma company (and no doubt AI labs), some will be able to be shared with the consumer in the form of lower drug pricing, and pharma could still generate the same RoI. Harnessing internal IP into molecular interactions will be critical to maintaining competitive advantage and preventing drug development from being fully commoditised.  

In Life Science & Tools there could be a multitude of effects from AI, depending on how their customers, primarily pharma, adapt their business models. There are already examples of pharma shifting R&D budgets from wet labs to spend more on digital tools, for example Eli Lilly, who recently signed a multibillion dollar deal with Insilico Medicine to use their AI engine to accelerate the discovery and development of novel therapeutics across multiple areas. Longer-term real-world testing will still be needed, and so any acceleration of drug launches on the back of AI would be positive. Lower drug pricing would likely be offset by increased volumes of new therapies, benefiting the ‘picks & shovels’ providers that support the industry.

In Medtech, we see less impact short term, although advancements in physical AI (robotics) will accelerate given improved outcomes can be achieved. On the services side, AI-driven efficiency gains should be achievable in structurally lower-margin, labour-intensive businesses.

In Healthcare Technology, we see huge scope for AI not only to drive internal efficiencies, but also to enhance customers’ operations. Many companies have accumulated years of proprietary customer data that can be leveraged and monetised, giving incumbents a meaningful advantage over any AI-native start up challengers that lack access to the comparable datasets. Given huge inefficiencies in the whole healthcare ecosystem, AI driven productivity gains are likely to come from Healthcare Technology companies that can improve outcomes, reduce labour spend and drive savings for the whole ecosystem. We think incumbent suppliers are best suited to provide these outcomes.