We made a few strategic changes in the second quarter of 2024 to better align our portfolio with current trends and outlooks.

First off, we trimmed our position in UnitedHealth Group, one of the largest health insurance providers in the US as the industry has seen an uptick in regulatory scrutiny. The Department of Justice launched an investigation into UnitedHealth and the potential anticompetitive effects of the vertical integration within the company, particularly the relationship between UnitedHealthcare and Optum, its health services segment. Furthermore, the market remains concerned about the core Medicare Advantage business, especially as the Centers for Medicare & Medicaid Services (CMS) announced that Medicare Advantage price increases would be lower than the industry expected. 2025 will be the second year of the significant three-year phased funding reductions to Medicare Advantage introduced by CMS last year. Finally, earlier this year UnitedHealth announced a ransomware attack on Change Healthcare, its subsidiary used to submit and process insurance claims. The cyber criminals encrypted and froze parts of the system, disrupting payments and claims processing for providers nationwide. The company ultimately ended up paying a $22 million ransom in bitcoin. As a result, several class action lawsuits related to the cyberattack have emerged. Given these headwinds, we decided it would be prudent to reduce our exposure to UnitedHealth Group.

Next, we made a bet on the intensifying demand for utilities worldwide driven by artificial intelligence. We cut our overweight in the energy sector relative to the S&P 500 by trimming back our position in Shell PLC (tkr: SHEL) and reinvested the proceeds in Vanguard Utilities Index Fund ETF (tkr: VPU) to give us broad exposure to utility companies powered by various energy sources including fossil fuels, nuclear and renewables. AI models are much more energy-intensive with a ChatGPT request requiring 10x the electricity of traditional Google searches according to the Electric Power Research Institute. Amidst this AI optimism, Goldman Sachs predicts that data centers will represent 8% of US power demand by 2030, versus just 3% in 2022. While many companies are investing in renewable energy to meet this demand, solar and wind sources are intermittent and data centers require uninterruptible power sources to continue processing. Therefore, we believe other energy sources, such as natural gas and nuclear, will be required to meet the surging energy demand.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Capital Management, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.