The 57-year-old American has a punishing schedule - he's on the road round the world for up to 8 months in a year! Guck told me he has the unique job of representing his company's investment management teams. Trying to pin down exactly his work scope, he became pensive and offered this explanation: "Well, it's ahh...sort of marketing but I don't have responsibility for sales or anything like that." What a luxury! He conceded perhaps it would be more appropriate to describe him by the term I suggested. "Evangelist? Yeah, that's not a bad word. I've never thought of it that way. Yeah, it's more of an investment evangelist. I enjoy doing it. And I have a history as a portfolio manager, so I know what it's like to manage money; I can understand what they're doing." During a recent brief stay in Singapore for a one-night only presentation to retail investors, he chatted with me and I thought it'd be good to begin our conversation by asking about Wellington. For investors in this part of the world - well, for me at least - the name sounds like anything else but a fund house!
Q: Tell us something about your company. Not many investors here are familiar with Wellington.
A: That's true, that's true. Wellington is an old company by American standards. It was founded in 1928 by Walter Morgan, who founded the first balanced mutual fund in the US - actually, I think it was the first in the world. It invested partially in bonds and rest in stocks. When the market crashed in 1929, his fund performed quite well compared to other funds which invested only in stocks. In 1960, four gentlemen bought over the company, and it ultimately became a private company. What they did was they bought back all the public stocks. So today, Wellington is purely owned by people who work there. We sold off the mutual fund business to the Vanguard Group. So the Vanguard Group was born out of Wellington in the mid 1970's - and Vanguard is today, the world's second largest mutual fund company after Fidelity. Our business now is managing the portfolios of institutional clients like asset management companies such as UOB. We don't sell mutual funds. We manage a lot of funds for people like Vanguard, Citibank and of course UOB. And because we don't distribute the mutual funds ourselves, we have a stronger focus on investment issues and are not diverted. If you are a broad based mutual fund company, you have the distribution and the marketing side. They require a lot of people and different kinds of skills. So our focus is simply investment management. We like to work with mutual fund companies in a complementary way and we try to supply the investment portfolios which they don't have the capability to run.
Q: That adds another layer to the cost; doesn't that make it more expensive for retail investors?
A: No, not necessarily. Because we are a specialist in so many things such as healthcare, it will be cheaper for a company like UOB to hire us to manage the money than it would be for them to create a staff of investment professionals to do it themselves. The cost to UOB to duplicate what we have would be prohibitive. I can't imagine how they can do this. It would take years and years to build this team that Wellington has. It would be impossible.
"I think we have the best healthcare team in the world. It's headed by a fella name Ed Owens who has been with Wellington for 26 to 27 years. He's been researching and managing healthcare companies for his entire career. He's responsible for the entire 14 billion dollars of healthcare portfolios that we manage for clients round the world. I think he's the most respected healthcare portfolio manager in the US, and the world probably."
Q: What's the biggest sector, in terms of money managed by Wellington?
A: One of the biggest sectors on the equity side is healthcare. It's the biggest sector assignment for us. We manage approximately 14 billion US dollars in this sector for clients all over the world including Vanguard. The other areas in which we have very large investments are information technology, telecommunications and energy. And we have a fairly unique specialty in the management of global Islamic portfolio for investors who wish to invest according to Islamic principles.
Q: It's interesting that you mentioned Vanguard having money with you when they're such big believers in index funds.
A: Well, many people don't know Vanguard has two types of funds. They are most well known in this region as an index funds provider. But in the US, a large portion of their business is in the management of active portfolios as well. So we manage about 8 billion dollars of fixed income and equity portfolios for them.
Q: Coming back to this global healthcare fund that you manage for UOB, tell us a bit more about the investment team.
A: This particular healthcare fund is managed by, ahem.. it may sound a little braggy...
Q: Go ahead.
A: We think we have the best healthcare team in the world. It's headed by a fella, Ed Owens, who has been with Wellington for 26 to 27 years. He's been researching and managing healthcare stocks for his entire career. He's responsible for the entire 14 billion dollars of healthcare portfolios that we manage for clients round the world. I think he's the most respected healthcare portfolio manager in the US, and the world probably. He has a phenomenal track record. Joe Schwartz has twenty odd years of investment experience in this area as well. He follows the medical technology and devices industry for us. And then there's Ann Gallo, who has 10 to 11 years of experience in healthcare as a research analyst. She's responsible for the hospital services industry. Kirk Mayer has 6-7 years of experience. He's the newest member of the team and is working on one of the most exciting areas of genetic and genomics research and biotechnology, which is also Ed's specialty. Ed, I think, is like the dean of biotech investors in the world; he has a real nose for biotech. And then there's Jean Hynes, who is Ed's protégé. She's a brilliant young lady and has been working with Ed for her entire career. She works with Ed on the large pharmaceutical and biotechnology stocks.
Q: Has any of these people been in the healthcare industry before?
A: I'm trying to think....hmmmm
Q: Well, I asked because some healthcare funds boast that they've got people on the team who were formerly pharmacologists or doctors.
A: To be honest.....I don't know 100 percent for sure. I don't think they have worked as pharmacologists; they are not medical doctors for sure. Ed spent his early career as an officer on a US submarine, so he's very attentive to details and has the mind of a scientist. I think our forte in this team is understanding the technology and the science behind these pharmaceuticals.
"The benchmark is a good reflection of today and yesterday; it's not a guide into the future. We think investors who are willing to put money in sector funds, are people willing to take a higher level of risk than the average person. So it's our belief that the index is not that relevant for what we should be doing for these people. Our job is to look into the future - and not the past - to see the new innovations, the new science and blockbuster drugs, and these are coming from areas that are not yet recognised in the benchmark!"
Q: Do you think your team is disadvantaged by the fact that none of them has had working experience in the healthcare industry?
A: I don't think so. Industry advantage can be helpful but not required. In some ways, being out of the industry may be even better because you come to your job with an unbiased perspective, and you don't have any historical baggage from the industry. If you're smart and hardworking, and can understand the literature, having a fresh eye maybe is better than having been trained to think only as a doctor or pharmacologist.
Q: During the launch of the fund several weeks back, one of your colleagues, I think it was Adam Puritz (look at related links), he said that this fund doesn't track a benchmark index. Why the highwire act without a safety net?
A: Our goal with this portfolio is to produce the best investment return for our clients. Hmm...........benchmarks are very appropriate for many types of portfolios, and we do manage a lot of portfolios in a benchmark relative way. But when it comes to sector funds like energy, healthcare and technology, you look at their benchmarks and realise that the companies that dominate the benchmarks may not be the best guide to what the future of this industry is going to offer investors. The benchmark is a good reflection of today and yesterday; it's not a guide into the future. We think investors who are willing to put money in sector funds, are people willing to take a higher level of risk than the average person. So it's our belief that the index is not that relevant for what we should be doing for these people. Our job is to look into the future - and not the past - to see the new innovations, the new science and blockbuster drugs, and these are coming from areas that are not yet recognised in the benchmark! Biotechnology is a small part of the benchmark; it's an "infantastimal" part of the benchmark, but that's where the future lies. Healthcare service delivery is a tiny part of the benchmark, but that's where the future lies. And you know, pharmaceuticals dominate the benchmark, but that's not necessarily where the future investment potential lies.
"The sector allocations do change, sometimes dramatically and sometimes in a short period of time. The turnover in this portfolio is fairly active, about 76 percent right now. That means three quarters of the companies in the portfolio have been traded in this past 12 month period. So there's a lot of room for changes within a year."
Q: How does the fund stack up against its peers?
A: If you were to look at Ed's record, which goes back to 1984 with the founding of the Vanguard healthcare fund, I think his team has the best performance record in this sector in the US. We have the data somewhere, I'm sure we can give the details to you.
Q: Looking at the fund's sector allocations, how has that changed over the last 6 months?
A: The sector allocations do change, sometimes dramatically and sometimes in a short period of time. The turnover in this portfolio is fairly active, about 76 percent right now. That means three quarters of the companies in the portfolio have been traded in this past 12-month period. So there's a lot of room for changes within a year. So the sector weights will move up and down based on the perceived value of the companies we look at. For example, biotech has changed. That's been the biggest change in the portfolio in the last 6 to 7 months. Today, it's slightly below 20 percent. It was almost 30 percent earlier in the year. These are valuation driven changes. When stocks get overpriced, according to Ed and his team, they sell them off. But when the market corrects, they may be back into these same stocks at a cheaper price. So the sector weights really reflect where the values are . So, it's a very bottom-up approach.
Q: So in that case, how do you ensure you are not dangerously overweighted in one sector?
A: We are frequently heavily weighted in one sector. We do not manage this portfolio with a very conscious benchmark relative process. It's a bottom-up process; it's driven by the value of the companies that we see in the sectors. For example, right now we think the pharmaceuticals are fairly valued but the hospital supplies companies are very cheap. So we end up with a very large weight in this sector.
Q: Do you have stocks of companies that have yet to make money?
A: Ahh.......we really do not like to buy companies, this is speaking for the firm as a whole, ahh..we prefer companies that are profitable, that are continuing to make a profit. Having said that, we do occasionally own companies that have not yet made a profit but have a very potential to make a lot of profit very soon based upon new products in the pipeline that are ready to hit the market. But I would say most of the companies in this portfolio are very profitable, and have very good above average profitability growth expectations.
"There's no real correlation between economic cycles and the healthcare industry. Spending on pharmaceuticals has been going up and up and up. It's not cyclical. It doesn't even slow down. It's constantly up and it's driven by demographics, ageing population and new technologies. People will spend money on their health no matter what. This is the last thing politicians will cut in bad economic times."
Q: Talking about profitability, you know, in the lead up to the US presidential elections, healthcare has become a major political issue. Pharmaceuticals have become the popular bashing target because of the high prices of drugs. That's going to put downward price pressure on companies, which in turn will erode their profit margins. How big a risk is that?
A: One of the biggest risks in the whole industry is political risk. This industry, as you know, is highly regulated by government round the world. There's a good reason for a lot of these regulations - we don't want people to misuse drugs. But at the same, it's subject to political whims and mood changes - as is everything. Right now in the US and developing countries, there's a strong push to have these large pharmaceutical companies provide drugs to developing populations for very low prices, if not for free. The very obvious case are the HIV cocktail combinations. They cost about 15,000 US dollars a year per person. If you're in Africa, with the world's worst incidence of HIV infection, there's not enough money to pay for that. Even if you were to stop paying for everything else, there wouldn't be enough money to support the AIDS population. This has become a global political issue - the high price of drugs. In the US, there's a bill being introduced by a Vermont senator, to allow the importation of drugs from Canada. They're about half the price of the same drug in the US. So that's a concern. This is a very R & D intensive industry. The profits are reinvested in research and development and the FDA (Food And Drug Administration Department) approval process. If you cut that profit stream off, it will slow the future development of pharmaceuticals. Someone has to pay for this.
There probably will be pressures and more control over prices. There's a silver lining in this possibly. You know, some of this technology coming into this industry, combined with the genomics research...what's going to happen is that the whole identification of the causes of diseases will mean the testing of new drugs will be more focused, more targeted, less costly and more efficient. We will be able to identify the DNA that's at fault and structure a pharmaceutical to address that problem. We will be able to find those people with that targeted problem to test that drug on. So the whole time it will take for the process of identifying, discovering, to the testing of the drugs and getting FDA approval, that will shrink by 3-fold. Instead of 15 years now, it may take only 5 years from discovery to approval. That will save immense amount of money. So while we have the political and downward pressure on prices, we also have the offsetting cost savings from these technologies. So it's not preordained that the profitability of this industry is going to decline necessarily because of pricing pressure.
Q: What's the correlation between healthcare sector and economic cycles?
A: I don't have the exact correlation data. But it's very low. It's almost uncorrelated.
Q: So the talk of a slowdown in the US economy will have no impact on the healthcare industry?
A: It matters not at all. There's no real correlation between economic cycles and the healthcare industry. Spending on pharmaceuticals has been going up and up and up. It's not cyclical. It doesn't even slow down. It's constantly up and it's driven by demographics, ageing population and new technologies. People will spend money on their health no matter what. This is the last thing politicians will cut in bad economic times. And our view of the US economy is that a slowdown is underway but it's very modest. The US economy is not going into recession. It will slow from 6 percent growth to maybe 4 and a half percent. It will not be below 3 percent. Inflation is under control and labour productivity is very high and strong.
Q: Are you equally passionate about your other sector funds as you are with this healthcare fund?
A: I guess from a personal perspective, we all have our interests. And I'm an investor in this healthcare fund with my pension money. I believe very much in this team and I know them for many, many years. I trust them with my money and my future. I feel the same way about our technology guys. I think we have a unique group of research people at Wellington that's the world's best.
Q: Shouldn't you diversify by putting some of your money in other asset management companies as well?
A: Absolutely not! I think the smartest thing an investor should do is to put money in something or someone you trust. Concentrate your efforts with them.
Q: You work at the same place as your fund manager. Do you run to them when the fund's not performing too well?
A: Of course we all do. We do that all the time, like say: "Ed what are you doing!" Hahaha.. The performance is not always up, and some quarters you go down. But over time, it goes up. There are times, especially in sector funds, when things can look ugly.
Q: But not everyone here has the chance to run directly to his fund manager when the market tanks.
A: No, no! I have a very unique and privileged position.
Brian Guck has a B.A. in Economics from Lakeforest College, Chicago and a Masters degree in Economics from New York University. Later, while teaching at Bryant College, Rhode Island, he added another credential to the list by earning a PhD. in International Economics from Clark University, Worcester, Massachusetts. However after over a decade as an academic, he decided to make a switch to the corporate world. Starting off as an international investment advisor at a bank that was subsequently bought over by the Bank of Boston, Guck then moved on to joined Wellington as a fund manager in 1989. In recent years, he has taken up the role of advising the company in creating portfolios for institutional clients round the world, as well as marketing Wellington's services.