April 26, 2024

The ‘metabolic trade’ is keeping Ariel Investments competitive amid weight-loss drug craze

Henry Mallari-D’Auria, chief investment officer of global and emerging markets equities at Ariel Investments, knows the Magnificent Seven dominates the headlines. But he's also very interested in what Wall Street is calling the "metabolic trade."

Currently, Ariel has two stock positions in leading providers of dialysis services — DaVita and Fresenius Medical Care. Fresenius Medical Care is the leader in the treatment of renal disease, while DaVita administers its services to over 2,700 outpatient dialysis centers across 45 states and operates more than 350 outpatient dialysis centers in 12 countries.

Jim Rice

Henry Mallari-D’Auria

The shares of each company sold off in October following the release of clinical data on the efficacy of glucagon-like-peptide-1 (GLP-1) weight-loss drugs and their potential to shrink demand for dialysis.


That gave Ariel, a $15 billion investment firm, an entry point in both names. "Even assuming high rates of both uptake and effectiveness, we believe the overall impact on dialysis volumes will be small in the near-to-medium term,'' Mallari-D’Auri said. "We also think the cardio protective effects of the GLP-1 class may enable patients to live longer, thereby increasing the overall size of the end-stage renal disease incidence pool."


Capitalizing on the metabolic trade

In healthcare, portfolio managers are now developing strategies around the metabolic trade, that is, the trend of patients taking weight-loss drugs that have secondary effects on other companies, such as kidney dialysis centers.

Another example: medical device companies such as hip replacement manufacturers that sold off after spikes in demand for weight loss drugs such as Ozempic and Wegovy.

“The market assumed that demand for dialysis would decline,'' Mallari-D’Auria said. "But only half of DaVita patients are there because of diabetes. Starting to use Ozempic isn’t going to change their status. Enrollment numbers saw a rebound. The stock grew. It was one stock that helped us keep pace in an AI-driven market,” he added.

"There are secondary impacts of the success of GLP-1" obesity drugs, he added. "It's hard to know exactly what those benefits will be. Reduced obesity may mean a larger percentage of the population loses weight, and results in a decline in the need for hip replacements. But if people are lighter and more active, perhaps they live longer."


Chip stocks also attractive

Mallari-D'Auria, who has four decades in emerging markets, international and global equities, said Ariel’s portfolios right now also have active bets including semiconductor manufacturers such as Intel, Samsung Electronics, Taiwan Semiconductor and Teradata.


“Investors think that because of AI, the bulk of the profits will go to Nvidia in the race to have faster processing,” he said. “But there are far more winners likely through the chain of semiconductor companies. We think they still offer a good investment opportunity."


Samsung benefits from increases in computational speed and volume over time, he added. Ariel holdings such as NetApp and Samsung so far have returned profits to shareholders through dividends and buybacks.


“AI is an accelerant. What’s different in this cycle? Faster speeds are needed for AI and there are very few manufacturers. The chip industry has consolidated," he added, with companies such as SK Hynix, Micron and Samsung controlling over 90% of the business.

Out of the Magnificent Seven stocks previously leading stock market indexes higher, “there’s only one left — Microsoft," he said. "We own that in our global portfolios and we think they’re farther along in the monetization of AI. We’re not counting on AI alone in our portfolio.”

Reprinted with permission from Pensions & Investments. © 2024 Crain Communications Inc. All rights reserved. 
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