e-fundresearch: Which benchmark do you adhere to?
Hodgson: MSCI World Healthcare Index
e-fundresearch: Are you also responsible for other funds at the moment?
Hodgson: Yes – the BlackRock Healthcare Fund (symbol MDHCX).
e-fundresearch: What is the total volume that you manage in all your funds?
Hodgson: As of May 31, 2009, the total was $483 million USD.
e-fundresearch: Regarding the performance: which performance did you achieve since the beginning of the year and in the years 2003-2008? Absolutely and relatively to the relevant benchmark?
e-fundresearch: How content are you with your own performance in the last years and this year?
Hodgson: No one should be content with their performance. Those who are content generally fail over the long term. Investing is a dynamic constantly changing process. Despite a strong desire to identify good companies for the long term, stocks go up and down often for reasons unrelated to how well the company is doing fundamentally. Part of my job as a fund manager is to trim or sell holdings where valuations have become too rich and add positions in companies where the market is placing too little value on the company’s prospects. The current investing environment is one of the most challenging in my career and I believe offers the opportunity to produce outstanding investment returns for active managers.
e-fundresearch: How are you able to deliver added value for your investors with your performance?
Hodgson: Value is added through our disciplined investment process which encompasses both top down and bottom up analysis. From a top-down perspective, we use economic growth forecasts, evaluations of the regulatory and political environment, and our best assessment of the equity market outlook to help determine portfolio sub-sector allocations. Our bottom up analysis focuses on fundamental research analyzing the sales and profit potential of companies´ products and services. Core areas of our efforts include evaluation of company management, sales potential of new products and valuations such as price earnings (P/E), price to book (P/B) and price to cash flow (P/CF). We combine both top down and bottom up views to drive stock selection, as we manage the portfolio as a growth fund that invests globally.
e-fundresearch: How long have you been a fund manager already?
Hodgson: I have 26 years of industry experience, 13 of which was spent on the sell-side and 13 spent on the buy-side. I joined Merrill Lynch Investment Managers (MLIM) in August 1997, at which point I became the Associate PM for the BlackRock Healthcare Fund (symbol MDHCX). I joined BlackRock following the merger with MLIM in 2006.
e-fundresearch: What were your biggest successes and your biggest disappointments in your career as fund manager?
Hodgson: One of my biggest successes as a fund manager was to add substantially to our position in Genentech during a time when others were underestimating the market potential for its in-line products and not properly valuing its new product pipeline. This paid off significantly in 2008-2009 as the company consistently outperformed fundamentally and was eventually acquired by Roche Holdings. Perhaps the biggest disappointment for me was prior to becoming sole manager of the fund when we were significantly overweighted in the drug distributors during a period of corporate consolidation. The Federal Trade Commission (FTC) ruled against the acquisitions which resulted in a sharp decline in the price of the stocks.
e-fundresearch: What kind of capital market situation do we have at the moment? How do you act in this environment?
Hodgson: While there have been recent signs of improvement, the capital markets continue to pose challenging conditions for some healthcare companies more than others. We have worked to avoid companies where access to capital has been squeezed off and in situations where the rising costs of that capital has made it prohibitively expensive to grow one’s earnings. Many smaller-cap companies with early stage products have been hit hardest by the credit crisis. This is because their business model is reliant upon normal functioning credit conditions to support funding for their research & development projects. These efforts tend to have high burn rates (a situation where cash generation from marketed products is below their spending efforts). As well, capital intensive industries, such as hospitals going to expansionary phases, are areas we have been avoiding as they experience budget cut backs.
e-fundresearch: What are the special challenges in this environment?
Hodgson: U.S. efforts to cut healthcare costs while expanding coverage to millions of uninsured Americans, has presented unique challenges this year. As a result of the Obama Administration’s reform proposals, there has already been a fair share of volatility in the sector. We ultimately believe investors may be overreacting to these announcements and that the final impact will not be as far-reaching as many may fear. Most of the proposed legislation is very expensive at a time where the US administration’s budget continues to be constrained. If something were to get passed, we do think there will be winners and losers as a result. For example, it may hurt the traditional HMOs, but could help the HMOs which focus on Medicaid patients. To the extent healthcare reform expands the coverage population, we believe this to be a positive catalyst for the sector overall as long as the government does not look to restrict company profits. Healthcare reform could also help drug distributors and prescription benefit managers (PBMs) as prescription drug volume increases. In particular, this would aid generic drug manufacturers as utilization rates are boosted from elevated demand and patent expirations from larger competitors. In regards to healthcare spending on information technology (IT), the specifics are vague and the timing uncertain. If the money is spent to “develop HIT standards” then likely it will be largely wasted. A more effective policy, in our opinion, would be grants or support of financing for hospitals and doctors to purchase existing technology. This would help companies operating in the clinical HIT space. Lastly, the stimulus includes proposals for advancing scientific and medical research, which could be a positive for the life sciences & tools companies.
e-fundresearch: What objectives do you have till the end of the year and in the mid term for the upcoming 3 to 5 years?
Hodgson: Clearly the objective for all fund managers, including me, should be to provide my shareholders with the greatest positive absolute return with acceptable risk as possible. As a fund manager of a sector specific fund I seek to be the number one fund in my sector and beat my benchmarks (MSCI World Healthcare index and S&P 500 index) as measured over a one, three, five and ten year period.
e-fundresearch: Do you model yourself on someone? Any ideals?
Hodgson: On a personal level, I try to live up to the standards set by my parents. They provided an environment which was tremendously supportive when I was growing up and encouraged me to explore new opportunities, take reasonable risks and, foremost, to do the right thing when dealing with others. As a fund manager I like to think of myself as an scientist always asking the questions, Why and How?, and then seeking to get the answers.
e-fundresearch: What motivates you in your job?
Hodgson: One of the key motivators for me is that every day is different. Although the investment process is the same day-to-day, the variables affecting each investment are constantly changing. Discovery and innovation are taking place daily in healthcare and I have a front seat in seeing and attempting to use this information for my shareholders. I also like that at the end of the day, week, month, quarter and year I can see the results of my decisions in tangible form through absolute and relative performance numbers.
e-fundresearch: What else do you want to achieve or do you have any further aims as a fund manager?
Hodgson: As a specialist in managing a sector specific healthcare fund, I feel that I have the best job in the world. Healthcare is an investing universe in and of itself with something for any type of investor, from growth to value; from innovative to mundane; and, from large capitalization to small cap stocks. I hope to be doing this for a very long time to come.
e-fundresearch: What other profession would you have taken interest in, apart from becoming a fund manager?
Hodgson: Back in my “youth” I once took a job preference test. The results showed that my “ideal” job was that of a perpetually travelling student. Being a mutual fund manager is perhaps as close as it comes to that ideal.