The long- and -short-term outperformance of the healthcare sector makes it a compelling strategy for hedge fund managers. A deeper review of healthcare’s subsectors reveals the substantial volatility and dispersion within this space – an environment that allows well-informed portfolio managers to take advantage of both long and short opportunities, particularly if they recognize that stock selection is critical.
The S&P 500 represents the performance of larger capitalization stocks. Year-to-date through June 2019, the best performing S&P healthcare sub-sector is Health Care Technology, up 39.8%, while the worst performing sub-sector, Health Care Services, is down 10.0%. In 2018, the Health Care Facilities GICS Index was the top performer at 30.5% while the Health Care Technology GICS Index was the worst performer at -22.2%.
Over the last five years, nine of the ten S&P healthcare sub-sectors generated a positive CAGR with Managed Health Care at the top with 21.0% and Health Care Distributors at the bottom with -3.0%. The S&P 500 Health Care Index itself has a five-year CAGR of 8.8%, compared to 8.5% for the S&P 500.
However, the S&P indices do not paint the full picture of performance in the sector. Notably, biotechnology stocks fared much better when looking at the Russell 2000 healthcare sub-sector indices, which are more small-cap oriented. The Russell 2000 Biotechnology Index is up 24.2% year-to-date and has a 10.8% 5-year CAGR. In comparison, the S&P Biotechnology GICS Index is down 2.1% year-to-date and has a 3.1% 5-year CAGR. The Russell 2000 Biotechnology Index is more representative of actual hedge fund exposure and thus performance. From this standpoint, it is clear that small-cap biotech is additive to a healthcare manager’s portfolio.
The data clearly demonstrates that healthcare has generated consistent and compelling performance across numerous metrics. The level of dispersion and volatility within the sector allows talented managers to take advantage of opportunities on both the long and short side – we expect they’ll continue to do so going forward.