This video is part of a series on investing in high-quality equities during times of uncertainty. For more on this topic read our research paper.
Don't Invest in A Cure
Obviously, there's a lot of focus from investors and from just people in general wanting a cure. There are roughly 70 companies that are working in some way, shape or form to develop something to address this pandemic. It's really hard to predict the science. If you look at the failure rate for drugs when they enter human trials, it's 90 percent. If you think about the number of biotechnology companies that have been able to internally discover and develop more than four drugs out of about 800 public biotech companies, only five have been able to do that. So, what we think is more important than trying to analyze when cases will peak or who is going to have the magic bullet to the virus, it's really important to focus on strong business models. Businesses that earn returns above their cost of capital and can reinvest their profits back into the R&D effort to generate future profits. So that virtuous flywheel is what we like to call it. So, generating good returns, putting money back into keeping that flywheel going.
Opportunities in the Current Environment
There's a tendency to want to gravitate towards, perhaps, the company that's developing a potential drug for COVID-19. What is more important and what we focus on, are strong business models. And so, I think investors need to look for products that have a disciplined investment philosophy and process, and execute it over the long term. And what that means in my mind is that active management is probably better suited for investors in this environment than passive. Because one of the potential advantages of active management is that you can modulate your risk. You can reduce risk on an active basis, which is something you don't get with passive products. They should be thinking about businesses and business models that they think will persevere or come out stronger out of this pandemic. They should look for products with a disciplined investment philosophy and process. And they should think about active management.
