Live Oak Health Sciences Fund
First Quarter, 2011
By Mark Oelschlager, CFA
Portfolio Manager
It was a strong quarter for the healthcare sector and the broader market. Economic activity continues to strengthen, and now there are signs of employment growth picking up, which should help make this a self-sustaining recovery. The Japan earthquake and nuclear crisis, while disruptive, shouldn’t have a long-term impact on the global economy.
Managed care stocks posted healthy gains in the quarter, as investors grew more comfortable with the effects of healthcare reform and more sanguine about enrollment growth. About 18 months ago we made an investment in the Medicaid HMOs when they were out of favor. In addition to being oversold for short-term reasons, the group, in our mind, was positioned to benefit from an expanded role under healthcare reform. The move has paid off, as the stocks have doubled. One of these companies, Molina Healthcare, increased 44% in the quarter. UnitedHealth and Wellpoint, two traditional HMOs, both returned over 20%.
Laggards included Par Pharmaceutical, whose outlook disappointed investors; Novartis, whose drug business is facing pressure on pricing; and Johnson & Johnson, who continues to be plagued by product recalls.
Small biotech performed strongly during the quarter, an area of limited exposure for the portfolio. The strength in the group appears to be liquidity – rather than fundamentally – driven, likely due to the very loose Federal Reserve monetary policy.
Throughout our management tenure, we have tried to take advantage of opportunities when they arise in various industries. Currently we are finding opportunity in the medical device area and have been increasing our weighting there. The industry has been characterized by strong returns on capital and health free cash flow but is being discounted for what we believe are short-term reasons.
Best regards,
Mark Oelschlager, CFA
Portfolio Manager
Live Oak Health Sciences Fund
This manager commentary represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice.
Past performance is no guarantee of future results. Live Oak Health Sciences Fund held the following percentage weightings as of 3/31/11: Molina Healthcare 2.5%, UnitedHealth 3.7%, Wellpoint 3.5% Par Pharmaceutical 3.3%, Novartis 4.4%, Johnson & Johnson 3.6%. Holdings are subject to change.
A "loose monetary policy" is a function carried out by a central bank, through the use of open market operations (buying and selling government securities), which have the affect of increasing the supply of money in the financial system.