Although still in its infancy, Obamacare has worked out very well so far for Michael Gregory. The 33-year-old hasn’t required any special medical attention — but his portfolio has reaped extensive benefits as the massive health-care overhaul has begun to take shape.
Gregory runs the $53 million Highland Long/Short Healthcare Fund (ticker: HHCAX), which has topped virtually all long/short funds both in last year’s weak health-care market and this year’s improved one, as well as relevant equity benchmarks. August trimmed its gains, but the three-year old Highland fund is still up 7.19% for the year through Sept. 8, topping 99% of 154 long/short equity funds. The health-care sector, meanwhile, was up less than 3%, while the Standard & Poor’s 500 Index was down 4.39% for that period. For the trailing year, Highland, which invests in about 90 stocks, is up 14.60%, versus a 10.09% gain for the S&P. Over three years, the health-care vehicle is up 9.88%, better than the flat S&P. With a 5.50% load and a 1.42% expense ratio, that performance doesn’t come cheaply. (Its turnover is a whopping 1,553%.) Even so, Morningstar awards Gregory’s fund five stars.
The Buffalo, N.Y., native has been able to blend two long-time interests in this fund. He spent his senior undergraduate year, in 2001, at the University of Pennsylvania’s Wharton School of Business, commuting to New York to work at Iroquois Capital, a long-short equity hedge fund he helped found. In 2005, he became a partner at Sands Point Partners, where he managed long/short heath-care portfolios. A year later, he launched Greenwich, Conn.-based Cummings Bay Capital, another health-care hedge fund. Highland Capital Management, a $23 billion Dallas investment firm, later bought Cummings Bay and put Gregory in charge of its long/short health fund.
He’s also a health-care policy wonk. In the midst of creating Cummings Bay, Gregory picked up an M.B.A. from a specialized joint program at Yale, which brought together faculty from its medicine, management and public-health programs. Many of the instructors advise the government on health-care issues, and their debates have helped mold his strategy.
“The greatest structural change to the health-care sector in 45 years is creating a number of winners and losers,” Gregory says, “which is a great opportunity for a long/short portfolio.” Obamacare won’t be completely in place until 2014.
He looks for companies that can contain costs, treat chronic illnesses, tap emerging markets, or help health providers do their jobs faster and better. The companies must also have defensible margins, strong free cash flow and shareholder-friendly management.
One favorite is Merck (MRK), the global pharmaceutical company that provides prescription medicines, vaccines and biologic therapies. He concedes that sales growth will be at best 2%, due to pending patent expirations, pricing pressure and lower drug utilization. But he believes Merck is a very attractive defensive name, given its 4.79% dividend yield and improving operating performance following a restructuring.
Gregory sees Merck returning 70% of free cash flow to investors via dividends, buybacks and acquisitions. He thinks it can earn $4.05 a share in 2012, topping analyst expectations of $3.84. Merck is forecast to earn $3.73 in 2011. The shares could be worth as much as 42, a far cry from their recent level near 33….
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