Healthcare has long been one of the most fertile hunting grounds for growth investors. The sector benefits from powerful structural drivers, including aging populations, rising healthcare spending, and continuous innovation. As a result, many healthcare investors focus on finding companies that can grow revenues and earnings rapidly over many years. The healthcare team at Sector Asset Management approaches the sector from a different angle. Rather than searching for the next high-growth success story, the team focuses on identifying businesses whose share prices have fallen out of sync with their underlying value.

“At its core, we are long-term, valuation-driven stock pickers,” says Trond Horneland, who runs Sector Healthcare Value Fund alongside four other team members. “The basic premise is simple: in the long run, stocks are driven by genuine cashflow and earnings growth.” While Horneland acknowledges that healthcare has historically been a natural home for growth investors, the team’s value bias leads them to a markedly different opportunity set. Rather than competing for the market’s most popular growth stories, they focus on companies facing temporary setbacks, deteriorating sentiment, or operational challenges, while retaining substantial underlying value.

“At its core, we are long-term, valuation-driven stock pickers. The basic premise is simple: in the long run, stocks are driven by genuine cashflow and earnings growth.”

Trond Horneland

Exploiting the Gap Between Price and Value

The investment thesis rests on a simple observation: short-term market dynamics frequently cause healthcare stocks to deviate meaningfully from intrinsic value. “We are not trying to predict the next catalyst or ride a theme,” says Horneland. “We are trying to determine what a business is genuinely worth and act on the gap between that value and what the market is pricing in.”

To support this process, the team combines fundamental analysis with a structured four-factor framework designed to improve timing and reduce behavioral biases. While investment decisions remain fully discretionary, the framework helps avoid one of value investing’s classic pitfalls: buying stocks that appear cheap but continue to deteriorate. “The model improves timing and guards against the trap of buying something cheap when everything is still moving against it,” says Horneland.

Healthcare is particularly well suited to this approach. The sector’s complexity, long development cycles, regulatory uncertainties, and heavy reliance on investor sentiment often create periods when share prices diverge significantly from underlying business value.

Lessons from Two Decades of Long/Short Investing

Much of the team’s current framework stems from its nearly two decades managing a market-neutral healthcare strategy, which was wound down in mid-2024. “A long/short beta-neutral structure forces a discipline that is easy to lose in other contexts,” argues Horneland. “Positions are constantly evaluated against each other, with no passive market tailwind to lean on.” That experience shaped the team’s approach to risk management, position sizing, and market signals. It also reinforced a lesson often underestimated by investors: timing matters. “Being early is often the same as being wrong for long enough to test conviction,” says Horneland. “Our framework is designed to reduce that risk while preserving the long-term valuation anchor.”

“There is value in having one mindset focused on finding attractive long-term investments and constructing positions in a sensible way, while spending less time on risk management of a short book.”

Trond Horneland

The decision to wind down the market-neutral strategy was partly driven by what the team viewed as an increasingly attractive opportunity set in long-only healthcare investing. It also allowed the team to concentrate fully on identifying long-term investment opportunities rather than balancing both long and short books. “There is value in having one mindset focused on finding attractive long-term investments and constructing positions in a sensible way, while spending less time on risk management of a short book,” Horneland notes.

Bottom-Up Investing with Risk Awareness

The portfolio construction process is almost entirely bottom-up. Position sizes are determined by the team’s assessment of expected alpha relative to company-specific risks, rather than macroeconomic views or sector allocation decisions. “We aim to find opportunities across all segments of healthcare and to trade actively around positions,” says Horneland. “Trading and diversification have historically been important contributors to value creation.”

“We aim to find opportunities across all segments of healthcare and to trade actively around positions. Trading and diversification have historically been important contributors to value creation.”

Trond Horneland

That does not mean the team ignores broader market forces. Interest rates, sentiment shifts, political developments, and regulatory cycles can all exert significant influence over healthcare stocks in the short and medium term. “We recognize that factors beyond valuation and fundamentals can be forceful short- to medium-term drivers,” says Horneland. “But we primarily treat them as risk considerations rather than sources of alpha.” 

A Structural Growth Story with Attractive Valuations

Despite the team’s value-oriented approach, Horneland remains highly constructive on the healthcare sector’s long-term prospects. “Structurally, healthcare remains one of the most compelling long-term investment cases: aging demographics, rising middle-class demand, and an innovation cycle in biologics, cell and gene therapy, and AI-assisted drug discovery that shows no signs of slowing,” observes Horneland. “Healthcare has historically delivered earnings growth of more than ten percent annually, and we expect a similar picture going forward.”

“Structurally, healthcare remains one of the most compelling long-term investment cases: aging demographics, rising middle-class demand, and an innovation cycle in biologics, cell and gene therapy, and AI-assisted drug discovery that shows no signs of slowing.”

Trond Horneland

What excites the team today is the combination of those structural growth drivers with unusually attractive valuations in parts of the market. “The opportunity lies in buying fundamentally sound businesses with meaningful R&D-driven optionality, at unusually attractive valuations,” he says.

Experience as a Competitive Advantage

Horneland argues that successful healthcare investing requires more than identifying promising companies. It demands a repeatable framework capable of navigating long development cycles, shifting sentiment, and inevitable periods of underperformance. “Healthcare cycles can be long, and the investors who add value over a full cycle are usually those with a rigorous, repeatable framework who resist abandoning it during a difficult year or two,” he argues.

Equally important is understanding how value is actually created within healthcare businesses. Traditional valuation metrics often provide limited insight in a sector shaped by patent expirations, regulatory milestones, and pipeline outcomes. “The current P/E ratio is of limited use in a sector governed by patent expirations and pipeline risk,” he explains. Instead, the team relies heavily on bottom-up, product-level valuation models and sum-of-the-parts analysis calibrated against strategic acquisition values and industry transactions.

That analytical depth, combined with nearly two decades of dedicated healthcare investing, has created what Horneland views as a meaningful competitive advantage. “Two decades of focused work on the same universe of stocks compounds into a genuine informational edge,” he concludes. “That kind of analytical depth and long experience in managing healthcare funds, compounds in ways that are genuinely difficult to replicate.”