Live Oak Health Sciences Fund
Third Quarter, 2011
By Mark Oelschlager, CFA
Portfolio Manager
Worries about a global economic slowdown, the European sovereign debt crisis, and the failure of the US government to seriously address its growing national debt drove the market sharply lower in the third quarter. Healthcare, typically an outperformer in such downdrafts, suffered losses in line with those of the market; the sector may have been due for a breather after it was the top performer in the first half of 2011.
The pharmaceutical companies, such as Eli Lilly and GlaxoSmithKline, were the strongest performers during the quarter as investors flocked to their stability and dependable dividends.
Laggards included managed care company Molina Healthcare, who is facing rate reductions in some markets, and analytical instruments company Waters, which fell on fears about research budgets. Waters is a longtime holding that goes through periods of rising and falling expectations, but has always emerged from its troughs as a stronger company producing higher earnings. We expect this time to be no different. Waters makes tools that allow academic and government labs to conduct research. The stocks of these tools companies have been hit hard by concern about research funding, and we are starting to find some good values there. Several years ago this area was a major focus of the Fund, but we reduced the weighting when the risk-reward deteriorated. It is once again emerging as an attractive area.
While healthcare reform was passed into law many months ago, we still do not fully know all of its effects. For example, the legality of the individual mandate to purchase health insurance is very much up in the air and will likely be decided by the Supreme Court. As far as the law is concerned, both sides appear to have a case, so the outcome is difficult to predict. As always, we will make our investments with a healthy respect for the inherent uncertainty of the future. One area that should be insulated from any negative direct effects of healthcare reform is pharmaceutical distribution. In fact, the companies that provide this service, a business that offers good returns on capital and high barriers to entry, may benefit from the increased healthcare coverage that comes with reform.
Best regards,
Mark Oelschlager, CFA
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. Mutual fund investing involves risk, including the possible loss of principal. Funds that emphasize investments in technology generally will experience greater price volatility. There are additional risks associated with investing in a single-sector fund versus a more broadly diversified portfolio, including greater sensitivity to economic, political, or regulatory developments impacting a sector.
Top Ten holdings in Live Oak Health Sciences Fund as of 9/30/11: Amerisource Bergen 5.3%; Biogen Idec 5.3%; McKesson 4.7%; Baxter International 4.5%; Cardinal Health 4.3%; Becton Dickinson 4.2%; Pharmerica 4.1%; Wellpoint 4.1%; Astrazeneca 4.1%; Covidien 4.0%.
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