Here's Why Baron Health Care Fund Chose to Exit UnitedHealth Group Incorporated (UNH)

Baron Funds, an investment management company, released its “Baron Health Care Fund” second-quarter 2025 investor letter. A copy of the letter can be downloaded here. The fund declined 5.06% (Institutional Shares) in the quarter, against a challenging backdrop for the broader Health Care sector, compared to a 6.19% decline for the Russell 3000 Health Care Index (benchmark) and a 10.99% gain for the Russell 3000 Index (the Index). In addition, please check the fund’s top five holdings to know its best picks in 2025.

In its second-quarter 2025 investor letter, Baron Health Care Fund highlighted stocks such as UnitedHealth Group Incorporated (NYSE:UNH). UnitedHealth Group Incorporated (NYSE:UNH) is a diversified healthcare company that operates through UnitedHealthcare, Optum Health, Optum Insight, and Optum Rx segments. The one-month return of UnitedHealth Group Incorporated (NYSE:UNH) was -13.78%, and its shares lost 53.55% of their value over the last 52 weeks. On July 29, 2025, UnitedHealth Group Incorporated (NYSE:UNH) stock closed at $266.04 per share, with a market capitalization of $241.336 billion.

Baron Health Care Fund stated the following regarding UnitedHealth Group Incorporated (NYSE:UNH) in its second quarter 2025 investor letter:

"UnitedHealth Group Incorporated (NYSE:UNH) is a diversified health and well being company with $450 billion in annual revenue, operating across four segments: UnitedHealthcare, Optum Health, Optum lnsight, and Optum Rx. Shares fell sharply during the quarter after the company missed earnings estimates and cut its 2025 earnings per share guidance, citing higher-than-expected medical costs in its Medicare Advantage business. Investor confidence was further shaken in early May by the abrupt departure of CEO Andrew Witty and the suspension of 2025 guidance. The company also mispriced its Medicare Advantage business for 2025—a challenge compounded by reimbursement changes and an influx of newly acquired members who had not been properly risk coded. While we acknowledge UnitedHealth’s potential to restore profitability in this segment over time through disciplined pricing and benefit adjustments, we chose to exit our position during the quarter in favor of other opportunities.

Aside from cash exposure, which accounted for over half of the outperformance in the period, higher exposure to better performing health care distributors and equipment stocks and lower exposure to Benchmark heavyweight UnitedHealth Group Incorporated in managed health care accounted for most of the remaining relative gains. UnitedHealth’s shares fell sharply during the quarter after the company missed earnings estimates and cut its 2025 EPS guidance, citing higher-than-expected medical costs in its Medicare Advantage business. Investor confidence was further shaken in early May by the abrupt departure of CEO Andrew Witty and the suspension of 2025 guidance. UnitedHealth has historically commanded a premium valuation, reflecting its scale advantages, integrated care model, industry-leading innovation, and consistent execution.

We sold UnitedHealth Group Incorporated because the company lowered guidance shortly after reporting earnings and then suspended guidance shortly after that. Management cited three issues: greater-than-expected impact from the health status of new members, higher-than-expected cost trends in the Medicare Advantage business, and a broadening of this higher trend to the Medicaid and commercial business. Some of these issues could potentially be fixed in the short term through repricing, but we felt management’s lack of visibility raised too many questions about the long-term earnings potential of the business. We plan to revisit the investment thesis after new management conducts its comprehensive review and resets earnings guidance."

UnitedHealth Group Incorporated (NYSE:UNH) is in 18th position on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 139 hedge fund portfolios held UnitedHealth Group Incorporated (NYSE:UNH) at the end of the first quarter, which was 150 in the previous quarter. While we acknowledge the potential of UnitedHealth Group Incorporated (NYSE:UNH) as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.

In another article, we covered UnitedHealth Group Incorporated (NYSE:UNH) and shared Hotchkis & Wiley Large Cap Disciplined Value Fund's views on the company. In addition, please check out our hedge fund investor letters Q2 2025 page for more investor letters from hedge funds and other leading investors.

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Disclosure: None. This article is originally published at Insider Monkey.