In the world of mutual funds, the Fidelity Select Health Care Portfolio fund is a graybeard. It hit the market in July 1981 when the fund’s portfolio manager, Eddie Yoon, 41, was still in his crib. But age is just a number for a fund, and the real numbers that matter pertain to shareholder returns. And under Yoon’s guidance since late 2008, this fund has delivered strong results that have put it in the top quartile of its healthcare fund peers in the last three-, five- 10- and 15-year periods, according to Morningstar.
Still, the fund’s one-year performance (through June 24) had lagged both the S&P 500 and the fund’s bogey, the MSCI U.S. IMI Health Care 25/50 Index, in part because of disappointing performance from a couple of holdings. But Yoon remains focused on the sectors he believes are the growth drivers in U.S. healthcare and which have produced strong investment returns in recent years. Those include healthcare equipment, biotechnology and managed healthcare, which were the fund’s three largest sub-industry sectors as of April 30.
Any 40-year-old mutual fund is bound to see some ebbs mixed in with the flows. Research from Morningstar Data shows the average life of surviving U.S.-domiciled open-end funds from inception is roughly 16 years and 10 months, which makes the longevity of the Fidelity fund stand out. Its performance also stands out, which speaks to Yoon’s ability to find profitable trends within the fast-changing healthcare world.
“Healthcare is such a dynamic industry to invest in,” he says. “The portfolio’s complexion has changed over time based on where we see opportunities and risk, but the process we deploy to try to generate returns hasn’t changed from the beginning.”
Healthcare never goes out of style, and it’s one of those sectors that seems like a no-brainer investment opportunity for as long as human beings will exist on this planet. Developed nations in the West, as well as Japan and China, are grappling with the health issues of their aging populations. Developing nations have younger demographics, which require different health needs. But this isn’t a monolithic industry, and some sub-sectors are better than others.
“We’ve been able to find those pockets of innovation early and capitalize on that, while also staying involved in the compounding interest of the bigger companies that have delivered really strong earnings,” Yoon says.
He notes that the healthcare economy in the U.S. is roughly $4 trillion, representing close to one-fifth of the national gross domestic product of about $22 trillion.
“It’s going through a renaissance, and I’m not talking about biotech,” Yoon explains. “I’m talking about the core infrastructure of how consumers experience the healthcare system. The concept of value-based care and moving away from fee-for-service care is really starting to take hold at the local level. And companies going public are trying to scale these new business models nationally.”
One of the knocks on the traditional fee-for-service care model is that it encourages quantity rather than quality of care. Yoon describes value-based, or managed care, as a more holistic system that helps keep people out of emergency rooms, addresses chronic conditions in their preventative phases, and aims to keep people from progressing to the most acute stages of their disease—which is the stage that costs the most money.
“Managed care will deliver better patient care while providing a better consumer experience at lower cost to the payer and the overall system,” Yoon says. “We’re going to reinvent how care gets delivered. It’s a generational change we’re very much in the early innings of.”
Managed Care
The two leaders in the managed care space also claim the two top positions in the Fidelity fund. The largest holding is UnitedHealth Group Inc. “It’s one of the biggest players in Medicare Advantage, and it has a strong infrastructure to deliver value-based programs across the country,” Yoon says.
He calls UnitedHealth’s Optum health services platform “an incredibly unique asset” that offers analytical tools to help providers and plans operate more effectively. “I believe this marriage of a health plan, data analytics and new value-based delivery models highlights where our healthcare ecosystem is headed, and UnitedHealth is the clear market leader, in my view,” Yoon wrote in a market commentary report earlier this year.
The fund’s second-biggest holding is Humana Inc., which Yoon describes as a pure-play Medicare Advantage company with sizable assets in healthcare services and facilities. He praised a recent deal where Humana bought out its private equity partners to gain full control of Kindred at Home, one of the country’s largest home-health providers with operations in 40 states.
UnitedHealth and Humana have provided steady growth while maintaining reasonable valuations. “I think valuations are a very important component in portfolio construction,” Yoon says. “I’m trying to deliver long-term returns for my funds’ shareholders, and if you don’t take valuation into account you’re setting up a situation where value is fully baked in.”
Such emphasis, he says, has helped the fund avoid some blowups caused by overextended valuations. He notes that most of the growthy, innovative companies in his fund sit in the middle-to-bottom part of the portfolio, while the top part contains cheaper stocks with a proven ability to compound their earnings.