Picking Positions in Health Care

Ryan Leggio: Hi. I'm Ryan Leggio. I'm a mutual fund analyst here at Morningstar. Joining me today is Tyler Dann, co-portfolio manager of AIM Charter. Tyler has been a manager at the fund since 2007. Tyler, thanks so much for joining us.

Tyler Dann: Thanks for having me in, Ryan.

Leggio: A lot of the stocks, in your portfolio especially, have recovered. We've talked about American Express $10 back in March, now $30-plus as we talk in October. I think a lot of your shareholders probably want to know: How do valuations look, roughly, across-the-board, now, and as a byproduct of those valuations, where is, roughly, your cash positioning?

Dann: Yes. So we have our cash, right now, towards the middle-high end of where we would typically see it. So, right now, we're around 15%. In March, we were considerably less than 10 percent. I think that you're right. Our cash weighting is, to some extent, probably the best way to explain it is our view of our opportunity set. When it's higher, we view the opportunity set as not as good as it would be if we were carrying low cash, because cash, for us, is a residual; it's not something that we manage to.

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So where we see valuations right now: there's less fertile ground out there for really great ideas. So we are seeing some. Given your knowledge of how we do, this probably won't be too surprising to you, but we're significantly increasing our weighting in the health-care sector, which is experiencing a great deal of controversy at this point.

Leggio: I was wondering if you could talk a little bit about your thesis there, because there's a wide divergence of opinions between managers. Some managers say there's just too much uncertainty, with pending federal legislation, to understand what the future free cash flows really are of some of these companies. On the other end, some managers are really betting on no legislation and, really, a market rebound in that sector. Can you give us an example of a few of the companies that you see, on a company-by-company basis, look the most attractive?

Dann: Sure. Well, firstly, thankfully we're finding ourselves in a fortunate position, analyst-wise, where we were able to bring on some great health-care talent, in the form of Derek Taner, earlier this year. Derek, as you know, manages the AIM Global Health-Care Fund. We've had a great deal of discussions over the course of this year and the previous years about what this upcoming legislation is going to look like.

Where we sit is we think there's enough controversy in the whole sector that it's creating some sector-wide excellent opportunities. What we view our job as is to make sure that we're purchasing the right stocks.

So, there are some stocks which will probably get creamed because the legislation won't go their way. We do think that there will be something that happens, pretty momentous. Whether or not there's a public option, we're still not sure, but we do think that the landscape will be changed.

One thing we think, though, that could be a little different, maybe, than what you're hearing is we do think there will be a bolus of spending that happens, really, through 2013. We think that companies that have products that are exposed to simply volume of treatment should do, actually, quite well. In Charter's case, pharma and biotech, and maybe some generics, they may not do so horribly, actually, in that type of environment.

We have comparatively less weighting in managed care. We do own some WellPoint, which we think is sort of too cheap to ignore, in some ways. But we are a little bit judicious there, as far as it's not a top weighting of the fund.

So that, maybe, gives you a little bit of a flavor as to where we stand.

Leggio: Great, Tyler. Thanks so much for joining us today.

Dann: Thanks, Ryan.

Leggio: Thank you for joining us. This is Ryan Leggio for Morningstar.