Fears over the future of US healthcare have hit smaller players but the team behind Kempen's Global Small-Cap fund are sticking with a offbeat bet despite its share price droping almost 20%.
Jan Willem Berghuis and Maarten Vankan told Citywire Selector US-based home health provider LHC Group had suffered from fears it would be paid less for its work by the Centers of Medicare & Medicaid Services (CMS).
However the managers, who both hold Citywire A-ratings, said the company was showing great growth potential. It is the sixth largest holding in the fund at 2.3%.
‘The drawback is they depend on the price levels set by CMS, so that impacts the company. The good thing is that they are the most efficient operator, with high margins.
'As of 2018, the providers will get rewarded based on their performance. From that point on they will get a higher reimbursement and we expect the margins to go up.
‘They started with providing care for four people and today they have 11,000 employees. It is a real American dream story. What we like about it is that it is the cheapest way of providing healthcare,’ Berghuis said.
The duo added the stock to the fund in December 2014 when it was below $30 dollars and it is now over $60-per-share. They believe the company is positioned for the long term.
‘You see the system moving to home help and within that industry they are the best operator if you look at how efficient they are but also in terms of rankings, they get the best scores. It is the best long term company in our view and we still like the stock very much.
The team also like IT firm Ubiquiti, which is the seventh largest holding in the fund at 2.1%. The company can sell products 20% cheaper than its competitors as it does not rely on a traditional sales model.
‘Last year revenue grew 30%, they have an operating margin in the mid-thirties and have gained a massive amount of market share. They have a different business model so they compete with Ciscos of this world without a sales team, only an engineering team,’ Vankan said.
‘They have great products but the product sells itself. So they make use of three million evangelists who are users and distributors that do all or the selling and the support.
'From that perspective it has been a very controversial company because no one believes that they would be able to grow to this scale with this business model. They are showing accelerated growth.’
Over three years to the end of August, the Kempen (Lux) Global Small-cap fund returned 28.76% in US dollar terms. This compares to a rise of 23.82% by its Citywire-assigned benchmark, the MSCI World Small Cap TR USD, over the same time frame.