Healthcare funds have roared back, but investors need to know what they’re buying

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Shares Magazine

10 September 2026

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The healthcare and biotechnology sector has undergone a major turnaround in performance in recent months, going from one of the more lacklustre parts of the equity market to delivering some of the highest returns available.

The average open and closed-ended fund returned about 17-20% over five years, with the sector ranking among the bottom half of its peers. In contrast, the average tech fund made more than 80% since 2021.

But zooming into more recent performance, and tech has been displaced by healthcare and biotech. It ranked top out of 51 sectors during the summer months, and this rally has dragged the sector’s one year ranking up into the top 10.

The sector was abuzz with headlines over the summer, with Moderna, one of the biggest pharmaceutical companies in the world, seeing its share price more than double after very positive results from trials of a skin cancer vaccine.

This stock-specific breakthrough comes alongside the ongoing march of weight-loss drugs, with cheaper and easier to take pill options coming to market.

All of this might prompt investors to pay this once out-of-favour sector a bit more attention. Should they do so, they may realise that it’s more complex than it seems. It is also one that is changing all the time as use of artificial intelligence and more nascent technologies like quantum computing promise to transform the industry.

What does the healthcare sector contain?

A key reason for investing in health care historically has been its defensive qualities with spending in this area perceived as being less exposed to fluctuations in the economy. 

There are 22 funds and seven trusts covering this area of the market, including eight tracker funds. Inside is a vast range of options, from specialists covering oncology or ‘global life sciences’ alongside more ‘generalist’ global healthcare funds.

Biotech funds were formerly part of the IA Specialist sector but following a consultation earlier this spring, the Investment Association (IA) ruled they were “less visible” here and allowed them to be housed alongside healthcare funds “giving investors improved visibility over an important part of the healthcare landscape, highlighted by the Life Sciences place in the UK government’s industrial strategy”.

To understand this sector, Thomas McMahon, head of investment trust research at Kepler, says you need to split it into two areas.

On one side is biotech. Which typically offers higher growth, as it is full of early-stage innovative companies, but also comes with higher risks. Whereas the healthcare portion encompasses businesses which are more mature.

They do share a lot in common, both in terms of jargon and their respective focus on diagnosing, treating, and preventing human diseases. But it is important to factor in their differences.

“Treat them separately with regards to the type of investment you’re going to have in terms of the maturity and potential risk return profile there,” McMahon says.

Indeed, in the IA’s conclusion about the recategorisation it observed that: “Some funds may have a thematic approach (for example healthcare innovation). Some funds may have a specific industry focus on biotechnology or life sciences. 

These funds may exhibit different characteristics from diversified healthcare funds and investors should take extra care when making comparisons.”

What caused the recent rally?

Alongside individual company stories, the performance boost for health care was driven by several factors. Most of the rally came from the biotech side, which saw a significant amount of mergers and acquisitions (M&A) activity.

Ailsa Craig and Marek Poszepczynski, portfolio managers at International Biotechnology Trust (IBT), note that “M&A is a powerful mechanism for value creation for a biotech company with limited commercial capabilities to extract the most from a successful product launch”.

They explain that the “current wave is a continuous way the industry operates” because “the structural driver is well-established: pharmaceutical companies face a patent cliff of significant scale, with an estimated $300 billion or more in cumulative lost sales projected into the early 2030s as blockbuster drugs lose exclusivity”.

This phenomenon “creates an attractive exit environment for smaller biotechnology companies and should provide a continued tailwind to M&A activity”, according to Alex Trett, a research analyst on the investment trust research team at Winterflood Securities.

Biotech has also enjoyed a period of bumper IPOs, with six drugmakers securing a combined $1.7 billion in Q1 this year. One of which was Kailera Therapies, which develops weight management therapies and secured one of the biggest stock market debuts in the sector’s history with a $2.1 billion valuation, which climbed to $3 billion following the first day of trading.

“All growth areas were under pressure and then you added in the political element that we were going into a US presidential cycle and drug pricing is a massive battleground there, and the debates around healthcare were weighing on the market,” McMahon says.

“But over last year, basically all of those clouds seem to have lifted. There’s no obvious pinprick that burst the bubble, but there were a lot more positive sounds coming out of the regulators, and the rates environment was a little bit eased. It didn’t look like the tariffs were going to push over the global economy. Whatever reason, there was just massive relief, and you had these high returns.”

Comparing top performers

Two of the best performers among funds which are focused on the biotech space are RTW Biotech Opportunities and International Biotechnology Trust, both of which have different approaches to the space.

Winterflood’s Trett says RTW is a “stand out given their specialist expertise and focus on biotechnology and healthcare innovation” and it has been a major beneficiary of M&A.

The trust can invest in both public and private stocks which allows them to invest in companies at “any stage of their lifecycle”, Oliver Kenyon, senior director, business & corporate development at RTW explains, allowing them to buy into very early-stage concepts, albeit with all the risks this brings.

Kenyon describes biotech as the lifeblood for what becomes a much bigger pharma market. He says: “About two-thirds of all drugs developed in recent years originated in biotechs. Big Pharma doesn’t innovate in the same way that it used to. It used to have huge R&D departments but those simply don’t exist anymore. Those companies acquire small and mid-cap biotechs in order to acquire that innovation”.

Kenyon highlighted China as a huge source of opportunity because it’s switching from being a consumer of external innovation to becoming a producer of domestic innovation. “About one third of all drugs entering clinical trial pipelines globally in the last few years are now Chinese. That’s second only behind the US,” he adds.

The Chinese government has made healthcare innovation a core part of its 2030 growth plan, partly driven by the demands of its ageing population, according to the World Health Organization.

Kepler’s McMahon describes International Biotechnology as a less volatile option for exposure to this sector.

“It’s more risk conscious about how it manages its portfolio and how it allocates between large and small caps. It did well in some tough markets for biotech.”

IBT concentrates most of its portfolio in the biotech sphere, where the higher growth potential is but takes more defensive positions in the broader healthcare universe  including through businesses which deliver more predictable profit and cash flow such as medical services.

“You’re less likely to be down and less likely to be down by so much,” McMahon says.

“It’s a steadier way of approaching it. Although to be clear neither trust is a ‘safe’ option...the sector is unlikely to be the core of your portfolio.”

Overall, an allocation to Healthcare & Biotechnology can provide a combination of diversification, structural growth, and exposure to one of the most innovative sectors and some of the biggest current investment themes can be found there. But it takes a bit of your own research to ensure you’re getting the type of exposure you’re after.

What risks are IBT’s managers focusing on?

Long-time IBT managers Craig and Poszepczynski pinpointed three key risks they were keeping an eye beyond 2026.

Clinical risk: A permanent risk to investing in biotech and healthcare as trials will sometimes fail, often due to insufficient efficacy or unexpected safety findings. 

Companies must demonstrate superiority over existing therapies across efficacy, safety, tolerability, and dosing convenience to achieve commercial success. 

Regulator risk: The pair say the “considerable turbulence” in the Food and Drug Administration (FDA) since Donald Trump took office has “weighed on biotech investor sentiment”.

The US is the main market when it comes to healthcare and biotech, and a lack of any clear regulatory outlook has been tough.
Commissioner Marty Makary, who took office in early 2025, oversaw a period of significant staff reductions and leadership clashes before departing amid internal turmoil, with more in-house fighting so far in 2026.

Macro and interest rate risk: Higher interest rates hurt more growth-focused parts of the market and IBT says the commercial complexity of next-generation treatments creates execution risks that disproportionately disadvantage smaller companies without large pharma support.