Healthcare Stocks: Testing the Vital Signs of Managed Care Providers

US managed care providers have been under pressure because of disappointing reimbursement rates from government-backed programs and rising utilization trends. But we believe companies that can surmount these obstacles should play a role in a diversified allocation to healthcare stocks.

Healthcare stocks have had a weak start in 2024. In the first four months of the year, the MSCI World Health Care Index advanced by just 3.2% in US-dollar terms, underperforming the broad MSCI World Index, which gained 4.8%. Perhaps the healthcare sector’s defensive characteristics just aren’t what equity investors need as concerns about macroeconomic growth fade.

We disagree. In our view, healthcare stocks offer a potent combination of offensive and defensive features that tend to capture a solid proportion of market gains while also curbing downside risk. Generating long-term outperformance through up and down markets requires a diversified approach to the sector that looks beyond the large pharmaceutical groups that often grab headlines with new treatments and blockbuster drugs.

Understanding the US Managed Care Industry

US managed care organizations are an important component of the healthcare mix. These large companies provide healthcare services, including health insurance, to members through a network of providers and offer a variety of health plans. Select businesses generally enjoy stable, recurring sources of revenue, as well as attractive growth rates and profitability, as measured by return on capital (Display).