Virologist Michael Taylor does volunteer work helping cancer patients. His task: picking medical stocks.
“I have never known much good done by those who affected to trade for the public good,” Adam Smith said. Maybe he’d have made an exception for the Simplify Health Care exchange-traded fund. All of its 0.5% fee revenue, after overhead, is donated to the Susan G. Komen Breast Cancer Foundation. The fund’s portfolio manager, Michael F. Taylor, takes no salary.
Private businesses that give away all profits and also succeed as businesses are scarce; the Newman’s Own food branding operation, which has donated $600 million to children’s causes, is unusual. An eleemosynary aim would seem to be even more out of place on Wall Street, where “greed is good” is the mantra.
Jamel Toppin for Forbes
“This is the first true impact-investment ETF,” brags Taylor, 52, who retired young and prosperous from a hedge fund career. “I have the luxury of not having to receive money for my efforts.” So far the fund has sent $250,000 to Komen. He picked Komen, he says, because it can effectively invest money in medical research—some $10 million a year, recently.
Customers of the Simplify fund aren’t making any sacrifices. The actively managed ETF, which opened in late 2021 and has attracted $144 million in assets, has averaged a 5.3% annual return since inception, per YCharts, matching the return of the giant Health Care Select SPDR fund, which passively tracks an index.
Taylor is assuredly not running any closet index fund. His annual turnover is 210%, par for a hedgie but freakish for an ETF. The SPDR fund owns Merck, Biogen, Amgen and Pfizer. Taylor shuns all four because, he says, looming patent expirations will decimate their profits. Pfizer commits the additional sin of making Covid vaccines, which the iconoclastic Taylor views as no good.
No one can accuse this guy of being shy about his opinions. At the beginning of the pandemic five years ago he was saying, loudly and impolitically, that the virus was a man-made Chinese concoction. Now he splutters about Moderna. Its mRNA vaccine can cause havoc with the immune system, he says, and might have to be withdrawn from the market. He may be wrong about that, but he has been right to avoid the stock, which is in the SPDR index fund. It’s down from a high of $484 to a recent $35.
Taylor is entitled to an opinion about viruses. After getting a master of science degree from Johns Hopkins he went to work for GenVec, a company trying to use viruses to deliver genes into the body. He was dismayed to discover that an awful lot of the job involved moving beakers from one table to another.
“I love the science. I just don’t like doing it,” he says. “I might as well have been a carpenter.”
Something else bothered him. This was during one of Wall Street’s manias for biotechnology, and GenVec’s stock was being touted on television. He had a dim view of the company’s prospects and wished he could bet against it.
Solution: business school. After getting an MBA from the University of Rochester he went to work for a succession of money managers: Oppenheimer, Caxton, Citadel, Millennium. He relates that one of his successes was getting into Gilead, now a big company, when it was in the early stages of making drugs for HIV. Another was shorting Valeant, the high-flyer with factitious revenue growth.
Patrick Welsh for forbes
How To Play It
By William Baldwin
Buying sector funds to beat the averages is a fool’s errand, but there is something to be said for them as a way to offset lopsided exposures in your spending patterns. Thus, oldsters confronting outlandish drug costs and the insolvent Medicare program might want to get shares of a medical fund. One choice is the idiosyncratic ETF described in the adjoining story.
A blander alternative would be an index fund: Health Care Select SPDR, Vanguard Health Care or Fidelity MSCI Health Care. They have assets between $2 billion and $39 billion, expenses below 0.1% and nearly identical top holdings weighted to the biggest players.
William Baldwin is Forbes’ Investment Strategies columnist. Illustration by Patrick Welsh for Forbes.
The Simplify ETF owns shares in some big companies familiar to health care investors, like Eli Lilly. Lilly looks expensive at 70 times trailing earnings but is going to enjoy a burst of revenue, Taylor predicts, given the recent decision by Medicare to cover its expensive weight-loss drug for patients who have sleep apnea. Overweight, sleep-deprived elderly patients also need an air pump, made by Resmed. Taylor holds that stock as well.
Outside the mainstream medical companies, the Taylor portfolio can best be described as quirky. He owns Chewy. Most of its customers think of it as a dog food company. Taylor sees the payoff elsewhere, in the distribution of high-markup veterinary medicines.
PureCycle Technologies is a money-losing firm working on a way to recycle polypropylene. What’s it doing in the health care fund? Taylor was looking for beaten-up stocks that might rebound and put “garbage stocks” into a search bar. Google served up a collection of waste management companies, including this one.
Intrigued, he dug into the chemistry and concluded that PureCycle is on the cusp of commercialization that will yield billions in revenue. Simplify’s rules allow up to 20% of assets to fall outside health care, and, when shares were trading below $4, off from a $32 high, the fund started buying. PureCycle recently closed above $7.
Arcutis Biotherapeutics is another long-shot bet with a potentially big payoff. This money loser is developing biotech treatments for autoimmune disease. The SPDR health fund owns none of it; Taylor’s fund has 8% of assets in the company.
Immunology is as big a deal as virology. Future treatments for cancer and diseases such as psoriasis and multiple sclerosis will involve manipulations of the immune system. Taylor has a personal stake in immunology research. He suffers from an autoimmune disease that left him with crippling spinal pain until a recent experimental treatment involving lasers. The treatment worked. He’s walking around now, after years of spending most days lying on his back.
Investors blow hot and cold on developmental-stage companies like GenVec, PureCycle and Arcutis. In the past few years, they have been rather cool. Since Simplify Health Care opened, health care in general and biotech stocks in particular have underperformed the market.
This optimistic risk taker is convinced that the market will turn in his favor. “We’re in a golden age of discovery and development in biotechnology, and only at the very beginning,” he says. “Humans are going to be living longer and better lives.” Let’s hope he’s right.
Editor’s note: Market-related data points are as of March 12.
More From Forbes