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This year has been a tough one so far for many segments of the market, but arguably no industry has been beaten up as badly as managed care. This category consists of health insurers and related businesses such as pharmacy benefit managers.
The average managed-care stock lost 27.68% for the year through April 8, making it one of the worst-performing industries out of the 129 that Morningstar tracks.
This may seem surprising at first glance because health-care stocks are supposed to do well in tough economic times, but managed-care stocks have been hit from several different directions.
Health-care reform in the spotlight
For one thing, the U.S. presidential election has brought health-care reform to the forefront of public discussion, with the leading candidates proposing major changes that could hurt insurers.On top of that, rising medical costs have been cutting into these companies' profit margins, leading to some high-profile reductions in earnings forecasts. Such fears, combined with company-specific issues, have taken a major toll on top managed-care players.
The industry's two largest companies, UnitedHealth Group (UNH, news, msgs) and WellPoint (WLP, news, msgs), are down 38% and 45%, respectively, for the year as of Wednesday. Most of their competitors are down at least by double digits.
These big managed-care stocks are widely held by mutual funds, with health-care-sector funds being affected most directly. One such fund, Fidelity Select Medical Delivery (FSHCX), has 40% of its portfolio in managed-care stocks, and its 26% loss for the year through April 16 is by far the worst in the health-care category.
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The second-biggest managed-care stake, at 28%, belongs to Icon Healthcare (ICHCX), which, not coincidentally, has the second-worst year-to-date record in the health-care category. The next three funds in the ranking are also health-care sector funds -- BlackRock Healthcare (MDHCX), AllianceBernstein Global Health Care (AHLAX) and Munder Healthcare (MFHYX) -- and all are among the category's worst performers this year.
Some diversified stock funds also have significant managed-care stakes, and the effect there has been similar. The table below shows the 10 diversified funds with the largest percentage of their portfolio in managed-care stocks, along with each fund's category, size and percentile ranking within its category for the year through April 16. We've excluded funds that are clones of other funds on the list.
| Category | Size (in millions) | Managed-care share* | Percentile rank** | |
|---|---|---|---|---|
Piedmont Select Equity (PSVFX) | Large growth | $16.90 | 15.40% | 76th |
Legg Mason Partners All Cap (SPAAX) | Large growth | $801.90 | 13.55% | 99th |
DWS Equity Partners (FLEPX) | Large blend | $274.50 | 13.22% | 95th |
ING VP Growth (IIGPX) | Large growth | $137.30 | 12.10% | 93rd |
Fidelity Large Cap Growth (FSLGX) | Large growth | $148.20 | 11.99% | 86th |
Natixis Westpeak 130/30 Growth (NEFCX) | Large growth | $40.00 | 11.77% | 90th |
Legg Mason Value (LMVTX) | Large blend | $13,289.40 | 11.13% | 99th |
White Oak Select Growth (WOGSX) | Large growth | $334.60 | 10.45% | 95th |
Dunham Large Cap Growth (DALGX) | Large growth | $73.80 | 10.45% | 25th |
JHFunds2 Core Equity NAV (JHCRX) | Large growth | $851.60 | 10.14% | 99th |
*Percentage share of assets in the fund. ** Rank in fund category as of April 16.
As the last column shows, these funds have been struggling mightily this year. Seven of the 10 are ranked in their category's bottom decile, and only Dunham Large Cap Growth (DALGX) is ranked better than the bottom quartile.
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Managed-care stocks aren't solely responsible for all this underperformance, but they've contributed to it. All of these funds have double-digit stakes in the industry, and each has at least one managed-care stock among its top 10 holdings.
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