Michael Castor predicted the coronavirus pandemic when most investors were dismissing the threat. S&P 500 Index lost nearly 20% during the first quarter, yet Castor’s healthcare focused hedge fund Sio Capital returned more than 7% during the same period.
Most equity hedge funds aren’t truly hedge funds. They are almost never 100% hedged. That’s because they can’t generate pure alpha high enough to justify their 2-and-20 fee structure. A typical hedge fund manager these days can outperform the market by an average of 2-3 percentage points in its long portfolio. So, if the market returns 10%, a typical hedge fund will probably return 12-13%. This isn’t bad, but no investor in their right mind would pay 2% fixed annual fee plus a 20% performance fee for such a performance (the net return would fall to 8% after these outrageous fees). So, they try to confuse investors by reducing their net exposure to 50% and pretending that what they return is pure alpha.
Michael Castor isn’t like this. On average his portfolio has been actually 5-10% net short over the last 7-8 years. His fund returned more than 11% annually over this period and all of this is pure alpha. There are very few hedge fund managers who can deliver this type of alpha over very long periods of time.
We interviewed Michael Castor this weekend and shared the video below. In the first half of this video we talked about Sio Capital, markets, and the coronavirus pandemic. We shared his views on Gilead Sciences Inc (NASDAQ:GILD) and efficacy of remdesivir earlier today here. “We’re actually at probably our max short position. I’m finding very little that’s cheap and a large number of stocks that are outrageously expensive,” Castor said in the interview below.
The second half of the video was dedicated to Michael Castor’s opinions on most of the large healthcare stocks. We asked him about GlaxoSmithKline plc (NYSE:GSK) (see the 32:11 minute mark in the video above). “GSK is interesting like Gilead they have an incredibly thin disappointing pipeline, disappointing especially in the context of how much is spent in R&D every year. These large cap companies even companies of well in excess of a hundred billion dollars can have single drugs that drive the profitability across the entire company. For Glaxo it’s shingrix,” Castor said. He also made the case why shingrix should be standard of care around the world.
Unfortunately Castor doesn’t think GlaxoSmithKline plc (NYSE:GSK) is an attractive stock to invest right now. Here is what he said:
“Earlier in the year or in the last couple of months of last year several concerns end up pushing the share price down. The first was that their HIV franchise was going to face more competition from Gilead biktarvy. The second was that their inhaler franchise was gonna see further price pressure as we saw more launches of generics of advair, their inhaler franchise. And those aspects outweighed my viewpoint for shingrix and then pushed evaluation down below reasonable levels, we stepped in. Glaxo was bounced back quite a bit it remains a little bit attractive versus other pharma companies but largely in line. And if you don’t have a position, now is probably not the right time.”
He also shared his best U.S. and European healthcare stock ideas with us. You can find out the name of his top European stock towards the end of the interview. We have been recommending a position in his top U.S. healthcare stock pick in our monthly newsletter, so I had to cut that part of the video out. However, you can still find out his top European healthcare stock pick which he expects to double.
If you are interested in finding out Michael Castor’s top healthcare stock pick, please subscribe to our monthly newsletter. The portfolio of our stock recommendations in the monthly newsletter returned 71.8% since March 2017 (through April 28th) vs. 27.9% gain for the S&P 500 ETFs. There aren’t a lot of fund managers whose picks beat the market by 44 percentage points in the last 3 years.