I think one of the benefits of investing in healthcare is that these companies have inelastic demand. If you need a new heart valve, inflation isn’t going to impact that decision.

We think healthcare companies are quite resilient during periods of inflation because their products are not substitutable and they deliver innovation. So an example of that would be the rise of robotics in surgery. This particular technology allows patients to get out of the hospital faster. There are less complications associated with these surgeries. And so really it’s a win-win. It’s a win for patients—they get out of the hospital sooner, they don’t have the same side effects. It’s a win for hospitals—they’re turning over their beds a lot quicker, they’re running a more efficient operation. So, in periods of inflation, we think that products like these actually have increased demand because companies want to drive more efficient results.

One of the things that’s often misunderstood about healthcare is this notion that it is purely a defensive sector. In our view, that simply just isn’t true. It is defensive, but it’s also offensive. And it’s offensive in terms of the innovation that’s happening. It spans everything from gene sequencing that’ll help us predict cancer through a blood test, all the way through to new types of drugs like gene therapy or mRNA vaccines that were very helpful during COVID.

But one of the ways we differentiate ourselves is that we don’t try and predict clinical trial success. It’s really hard to get a drug all the way through human trials and onto the market. The stats are actually 8%, meaning 92% of the time the company’s going to fail. So, with those low odds, it’s really hard to figure out which ones will succeed.

What we’re focused on as we think out over the long term, in terms of interesting technologies, would be the rise of things like machine learning and artificial intelligence in healthcare. It’s no secret that healthcare has lagged behind many other areas in terms of its adoption of technology. It’s been far easier to order a meal on your phone than it has been to speak to a physician. COVID has changed a lot of that. We think it’ll continue to change. But we do think that technologies like machine learning and artificial intelligence will play bigger roles in the years to come.

But at the end of the day, what matters to us is a business’s ability to make money in a profitable way—generating high returns on invested capital and being able to reinvest those profits back into the business. It’s a fancy way of saying quality compounding. Within that construct, healthcare’s fabulous. You’ve got a lot of innovation, you’ve got inelastic demand and you have pricing power. You have profitability and strong reinvestment rates. So, we think. regardless of the market environment, investors should have exposure to healthcare.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.

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