Current investment choices of top-performing healthcare sector stock pickers discussed

The Baron Health Care Fund has had exceptional performance in its first five years since its establishment in 2018. The fund primarily focuses on helping DC policymakers contain the COVID-19 pandemic, managing the boom-bust biotech IPO market, reducing prescription drug spending, and other healthcare costs.

Despite the challenges posed by bankruptcies among low-quality healthcare companies and competing funds caught in the pandemic-fueled IPO frenzy, the Baron Healthcare Fund emerged as the best-performing healthcare sector fund in the five years ending May 19. Morningstar, an investment research firm, reported that the institutional stocks rose by 13.1% annual total return, compared to the category average fund with a 6.7% return.

One of the keys to the fund’s successful performance is its focus on holding quality companies with competitive advantages and strong management teams. The portfolio, consisting of around 40 to 50 stocks, is relatively concentrated, with half of the assets in the top 10 holdings. The retail stock class charges an annual fee of 1.1%.

The fund remains vigilant and keeps an eye on several key themes in healthcare, such as advances in gene therapy, an aging population, increased prevalence of diabetes and obesity, and increased adoption of Medicare Advantage, a private alternative to traditional Medicare. For instance, the fund holds DexCom Inc. DXCM, which developed a continuous glucose monitoring system for all types of diabetes patients, regardless of their insulin use.

Although the fund managers acknowledge the impact of Medicare’s drug price negotiations, they remain confident in the long-term growth prospects in their market, particularly in Medicare Advantage’s additional benefits. The fund’s top holdings are dominant players in the Medicare Advantage market, including UnitedHealth Group Inc. UNH, Humana Inc. HUM, and Elevance Health Inc. ELV.

However, the fund managers recognize the potential impact of DC’s scrutiny over drug costs and access, as evidenced by their earlier decision to sell a position in the Cigna Group CI fund. Nevertheless, they remain bullish about the prospects of PBM and other managed care companies while acknowledging their ability to adjust their economic models accordingly.

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