2016 was a good year overall for Wall Street, but few equity funds can top the performance of Highland Capital’s Small Cap Equity Fund. That small-cap stock fund focus on energy stocks gave it a return of nearly three times the return of the S&P 500 Index. While the Small Cap fund is just a small part of the $15.4 billion managed by the Dallas-based Highland Capital Management, it’s a high-profile fund that is a good indicator of how the company’s other funds may fare.
There are two ways a capital management firm can respond to having a great performing year. It can sit back on its laurels and hope things will continue for another year. Or it can look for the next wave to ride, the next under-performing sector to focus on in the upcoming year.
Highland Capital’s Small Cap Equity Fund is managed by James Dondero, president and co-founder of Highland Capital, and Michael Gregory, a chief investment officer at the firm. They’ve opted to seek out the next under-performing sector likely to explode in the next several years. And according to Gregory, they believe that sector in health care.
In a recent interview, Gregory pointed to the ongoing opoid epidemic and the push to quickly approve drugs that are less addictive than opoids. There are also several pharmaceutical firms bringing new drugs to the market to help with opoid addiction. He says insurance companies are more willing to approve the use of these drugs than in recent years and this increase in the market will bring a big upside to a number of under-valued health companies.