| O. Andreas Halvorsen, Viking Global Investors (Bloomberg) |
Viking Global Investors, the Greenwich, Connecticut, hedge fund firm headed by Tiger Cub O. Andreas Halvorsen, tells clients it has sharply cut back its big bet on health care.
In its fourth-quarter letter to investors, Viking tells clients that its net exposure to the pharmaceutical and biotechnology industries stood at 8.7 percent in Viking Global Equities, its main long-short fund. This is down from 21.3 percent a year ago.
The firm’s net exposure to the entire health care sector was increased to 15.2 percent from 13.1 percent at the end of the third quarter. However, it is down from 19.6 percent at the end of the second quarter and 19.4 percent from a year ago.
In the letter, Viking tells clients its drawdown from long positions in health care stocks in the second half “erased the majority of profits” the sector generated in the first half of the year. Even Viking’s health care short bets fared poorly, especially among Japanese drug stocks and U.S.-based biotech stocks.
Despite the big setback from health care stocks, however, Viking still managed to post a 4 percent gain in VGE in the fourth quarter and an 8.3 percent gain for the year. The Viking Long Fund was up 5.7 percent for the quarter and 4.5 percent for the year.
Viking’s profitable maneuvers through the volatile health care sector are in stark contrast to bets made by Larry Robbins’s Glenview Capital Management. That firm also had taken a huge bet on these stocks, which propelled it to big gains in 2014 and 2013. However, in 2015, Glenview Capital Partners finished the year down about 18 percent, suffering the majority of its losses in September from losing health care stocks. We don’t know what percentage of assets health care stocks accounted for in Glenview’s funds, although it does appear to be larger than in Viking’s, simply judging by their dominance among Glenview’s top ten holdings list.
In any case, health care wound up being the worst-performing sector for VGE in the fourth quarter and for the full year, according to the letter. (Energy was the worst performer for Viking Long Fund).
“In recent years, healthcare equities have benefited from a tailwind fueled by expanded insurance coverage under the Affordable Care Act, favorable credit markets, an innovation and productivity surge in research and development, and industry-wide consolidation,” Viking explains in its letter. “Our relatively high net exposure to health care combined with solid stock picking made this sector the top performer for the funds in three of the prior four years.”
Looking ahead, Viking asserts it will become tougher to make money in the sector, since many of the favorable trends have now run their course. This said, Viking remains “excited” about its best ideas and assures it sees “ample opportunity to earn a compelling long-short spread.”
Viking, which managed roughly $33 billion at year-end, tells clients it was badly hurt by Valeant Pharmaceuticals International, its eighth-largest long position at the end of the third quarter and the seventh largest the prior quarter. The embattled drugmaker cost Viking 1.6 percent in the fourth quarter. The stock, which Viking has held since 2010, was one of its five biggest winners in 2011 and 2013.
Even so, Viking added to its Valeant position in October and November after researching the factors that drove down Valeant’s stock — including controversies surrounding the mail-order pharmacy Philidor Rx Services. “We found the valuation attractive even with the operational disruption and the loss of revenue caused by the shutdown of the Philidor sales channel,” Viking explains. The hedge fund firm also says it found that less than one third of Valeant’s revenue growth over the past two years came from aggressive price hikes on its drugs.
“Despite the setback, we are encouraged by the steps the company has taken to address the situation and have remained invested in the company,” Viking states. “We continue to believe that Valeant’s core product portfolio and its emerging drug pipeline will generate attractive organic growth for the foreseeable future, even in the absence of additional acquisitions or drug price increases.”
Interestingly, though, the stock is no longer among Viking’s ten largest long positions. However, drugmakers Allergan and Teva Pharmaceutical Industries are among its five largest longs, while drugstore giant Walgreens Boots Alliance is its eighth largest.
Viking’s largest positions at year-end were Alphabet, its best-performing long holding in the fourth quarter and for the entire year, and Broadcom, its fourth-best long in the fourth quarter and all of 2015.
