Wed, 5 Jun 2013
A sea change of trends in the health-care industry will be a boon for IT investments, and the firms that can limit costs are the growth businesses of tomorrow, says Fidelity's Eddie Yoon.
Flynn Murphy: Hi. I'm Flynn Murphy with Morningstar. Joining me today is Eddie Yoon, who is a health-care sector leader for Fidelity and a portfolio manager of Fidelity's health-care funds. Eddie, thanks for being here.
Eddie Yoon: Thanks for having me.
Murphy: One of the things that I think investors are interested in, in the health-care sector in particular, are how some macro events that have occurred in recent years will be impacting investments going forward, over the long haul. Something that we talked about was the Affordable Care Act and how that's going to impact the health-care landscape going forward. What are you looking at in terms of themes for your portfolios?
Yoon: I think if you think about the portfolio, there are a couple of themes that I'd probably address. As it relates the Affordable Care Act, the health-care economy is one of the economies that have yet to move from an analog to a digital world. Software-as-a-service, cloud-based computing has brought tremendous amounts of productivity to enterprise software, and that needs to happen in the health-care space. So I view health-care IT as a tremendous area of potential investment going forward. As we digitize health care and hospital records, we're going to have much better ways to deliver care.
Outside of that, I see opportunities in the emerging middle class. An example of that might be, I just had a trip over to Southeast Asian. There's going to be 200 million people in Indonesia that get insurance over the next four or five years, and that's going to drive tremendous amounts of growth in those markets. Who is going to benefit from that? A lot of these multinational companies will benefit from that. Health care is a space that should continue to show tremendous amounts of growth going forward.
Murphy: Within the health care, an industry that's really seen tremendous growth in recent years as biotechnology. What's your outlook on the biotech sector, and are you positioned for, I guess, further growth in biotechnology. Or are you seeing more and more risks cropping up as biotech has surged in recent years?
Yoon: So I think if you think about the biotech space, you need to differentiate the companies that make money and the companies that don't make money. The small-cap universe is, obviously, very stock specific. It is driven by particular clinical trial events and data readouts, and if they are successful, obviously the stocks can do well, and if they're not, there is a decent amount of capital impairment that happens. So we try to find insights in the small-cap space where we have an edge on which drugs we think are going to do well and invest in those companies.
On the big-cap side, I think these companies are much more stable businesses. They sell lots of products not only here in the U.S., but also globally, and they're very stable businesses. And there's no real biogeneric legislation that's out there, so the duration of these cash flows are actually very long, which should continue to provide a good basis for growth of these bigger-cap companies.
Murphy: When investors are thinking about the risks involved in smaller-cap biotech, it sounds like there's a lot of binary risk involved. How do you approach that risk when you're thinking about investing?
Yoon: So when I think about the smaller-cap names in the portfolio, they tend to be smaller positions within the portfolio. So if a biotech company trial fails in a company that we own, the stock generally goes down 50% or 60%. But it's a very small percentage of the overall portfolio, so my shareholders don't necessarily get impacted to a great degree. And if we're right, and hopefully we're right more often than we're not, these stocks can be four, five, six baggers over the course of three to four years. So I try to make them position sizes where if they work, they actually incrementally help portfolio returns over time, and if they fail, they don't actually hurt that meaningfully over a short period of time.
Murphy: Within the sector, how is innovation, or I guess new technology that's impacting the consumer experience, how is that starting to change your outlook on what investments might look appealing or, I guess, what stands the best chance going forward?
Yoon: I think if you think about health care, health care is going to move to a consumer economy, where the consumer is going to have much more choice in terms of how they spend their health-care dollars and where they spend it on. Today there are not a lot of great apps, technology products that help the consumer. That's about to change. If you look at a lot of what's coming out of Silicon Valley, you're going to be able to go on your smartphone, you're going to be able to look at hospitals and doctors, read reviews about them, understand who's got the highest quality and what they cost. And that's a very different way of consuming health-care than it has been historically.
As you empower consumers, you're finally going to start to see a correlation between cost and quality. So the way that health care is delivered today is going to be very different from the way that it's delivered 10 years from now. The way that changes is that the shopping experience for the consumer is going to change and they're going to be empowered to make much more relevant decisions about their own health care going forward.
Murphy: So the consumer will be a little bit more in the driver seat in this?
Yoon: And hopefully the technology industry will empower the consumer by giving them the information and the transparency to make better decisions about their health care.
Murphy: Is the health-care industry as a whole poised to handle this sea change?
Yoon: The health-care industry, like especially here in the U.S. due to the Affordable Care Act, is going to look very different sort of 10 years now than it does today. If we do our jobs well, like we're going to be able to invest behind the winners and avoid the losers. As industries go through periods of big change, like that tends to happen we've seen in other industries, it's going to happen in health care. And the goal of my team and the research that we try to do is try to find, who are those winners going to be, and get involved in them early so that the shareholders can benefit over time.
Murphy: Health care is obviously a large portion of gross domestic product, and as I understand it, governments are one of the single largest payers of health care. But in recent years we've started see issues where governments are dealing with deficits, debts, that kind of thing. How will that impact the health-care landscape going forward?
Yoon: So like you said, health care is 18% of GDP today, and it's growing faster than GDP. If you think about it in the long run, it really can't grow to be 25%-30% of GDP because it'll crowd out investments that we have to make in other key areas of our economy. So when you think about how does that impact health care, you need to own those companies that are driving deflationary forces into the economy, so companies that are actually pushing down on the cost trend, pushing down on the cost curves. Examples of that, if you can drive deflationary forces through the business, those are going to be the growth businesses of tomorrow. And by owning those names, you can own the growth parts of the universe and avoid kind of the companies that are coming under the biggest headwinds, and hopefully that will benefit shareholders over time.
Murphy: Eddie, thank you for being here.
Yoon: Thanks for having me, Flynn.
Murphy: And on behalf of Eddie Yoon with Fidelity, this is Flynn Murphy. Thank you.