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By Flynn Murphy | 05-10-2013 02:00 PM

Tech Opportunities Powering Up for Health Care

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.

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