(Bloomberg Opinion) -- Eddie Yoon took over the Fidelity Select Health Care Fund in 2008, just as the financial crisis ushered in the worst recession since the Great Depression. He outperformed health-care's benchmark during the ensuing 12 years when his fund quintupled to almost $7 billion. That record made him No. 1 among 20 peers managing at least $200 million with combined 1-to-5-year returns, according to data compiled by Bloomberg.
He has never seen anything like the Covid-19 pandemic, an unprecedented disruption that, for the first time, he says, is aligning patients, health-care providers and payers, including insurers.
The coronavirus has “fundamentally changed the way we think about the outlook,” said the 40-year-old Yoon earlier this month in a remotely arranged interview near Fidelity's Boston headquarters. “Big winners and losers are going to emerge, and that provides an enormous opportunity for folks like us that run active funds that really capitalize on the companies that are going to be successful in that new world.”
Basel-based Roche Holding AG, Indianapolis-based Eli Lilly & Co., London-based AstraZeneca PLC and South San Francisco-based Principia Biopharma Inc. are “still are very big parts” of Fidelity Select Health Care. They appreciated 20%, 17%, 14% and 110%, respectively, during the past 12 months.
Yoon said he relies on the “same investment framework that we've been using for over 10 years.” This means focusing simultaneously on free cash flow — how much money a business has to sustain its operations after paying for buildings, equipment and other capital expenditures — and the long-term growth rates of companies.
“We construct a portfolio where we're trying to extract the most amount of return — income plus appreciation — for the least amount of risk,” Yoon said. “With the demand shock we're seeing in our economy as well as this public health-care crisis, things are changing rapidly, so when you are uncertain, you want more downside protection or more upside opportunity.”
Fidelity Select Health Care almost tripled its weighting in Western European companies compared with the MSCI US Health Care Index during the past three years at the expense of U.S. companies whose underweighting increased to 19% from 10% versus the benchmark, according to data compiled by Bloomberg.
“Coming into 2019, we were de-risking” as “a lot of growth stocks got very, very expensive,” said Yoon, who joined Fidelity after an initial stint at JPMorgan Asset Management starting in 2002, when he received a B.A. in business economics from Brown University. “We actually narrowed the pharmaceuticals positioning in the fund, and I own more large pharma companies now than I have before.”
Fidelity Select Health Care gained 9.3% during the past 12 months, outperforming the benchmark by 5.2% when the MSCI declined 4.1%. Most of the return came from the pharmaceutical companies he selected even when the fund held fewer of them than the benchmark, according to data compiled by Bloomberg.
“My general philosophy is deliver a double-digit return for shareholders that will outperform the underlying benchmark and other asset classes that investors might want to put their capital into,” Yoon said. The fund returned 549% since he became its manager.
Health care remains something of a haven during periods of market turbulence. When the S&P 500 index lost 12% last month, the shares of health-care companies lost only 3.8% when the comparable measures for the financial and energy industries declined 21% and 35%, respectively. During the last recession, between December 2007 and June 2009, health care retreated 25% when the S&P 500 decreased 35%, according to data compiled by Bloomberg.
Yoon, who also oversees Fidelity's global health-care research, said “until we get to a way to find a health-care breakthrough — whether it be a therapeutic, a preventative medicine, helping people develop antibodies against the coronavirus or a vaccine — we're going to have to deal with this coronavirus as we think about the demand picture for the foreseeable future.”
While Yoon dealt with the upheaval of the financial crisis in 2008 and 2009 and the disruption caused by the 2010 Affordable Care Act, which went into effect in 2013, “this time it's different,” he said.
“The companies that we're trying to find that actually are impacted by this crisis are companies that are going to see a cyclical benefit where demand is going to rise because of the coronavirus and then stay high for longer because of something unique in their business model. Those are the companies we own and will hopefully own for a long time.”
-- With assistance from Shin Pei, Cara Slear and Chase Lynch.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Matthew A. Winkler is Co-founder of Bloomberg News (1990) and Editor-in-Chief Emeritus; Bloomberg Opinion Columnist since 2015; Co-founder of Bloomberg Business Journalism Diversity Program in 2017. During his 25 years as Editor-in-Chief, Bloomberg News was a three-time finalist and winner of the Pulitzer Prize for Explanatory Reporting and received numerous George Polk, Gerald Loeb, Overseas Press Club and Society of Professional Journalists and Editors (Sabew) awards.
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