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Value Line’s Health objective group is a fairly small, yet surprisingly diverse, collection of mutual funds. Clearly, the funds in this category invest the vast majority of their assets in healthcare and related businesses. That said, there are a number of different variants within what would seem to be an otherwise narrow space.

The two biggest areas of differentiation are biotechnology and general healthcare funds. The former, such as Franklin Biotechnology Discovery Fund (FBDIX), strives to focus on companies at the forefront of medicine in what is called biotechnology—often these are small companies with novel drug compounds in the testing stage of research. The latter, meanwhile, may own shares of biotech companies like T. Rowe Price Health Sciences Fund (PRHSX), but enjoy a much broader mandate to invest in healthcare across all of its subsectors. These funds often own both mature companies, like the major pharmaceutical firms, and developing companies, like the biotechs or small medical device makers.

There are, of course, index offerings, such as Vanguard Health Care Index Fund (VHCIX), and leveraged funds, such as ProFunds Biotech Ultra Sector Fund (BIPIX) and ProFunds HealthCare UltraSector Fund (HCPIX). In addition, funds take different approaches to foreign exposure, with some using words like “global” in their name to highlight their worldwide focus. 

There are also funds that focus on subsectors beyond the more established biotech niche, including ProFunds Pharmacuticals UltraSector Fund (PHPIX), a leveraged fund focusing on drug stocks; Fidelity Select Medical Delivery Fund (FSHCX); and Fidelity Select Medical Equipment and Systems Fund (FSMEX). Some of these niche categories are so narrow that there is only one fund specializing in the space (such as the two Fidelity offerings), while others have multiple entrants, such as the drug-focused ProFund. 

Ultimately, if there is a particular healthcare niche one is interested in, there might just be a fund to fill the need—it’s just important to ensure that it is managed in a way that is complementary to one’s overall investment approach. For most investors, however, a broad-based healthcare-focused fund is probably most appropriate.  

Over the long term, the Health objective group has been a reasonably good performer relative to the broader market, as measured by the Russell 3000 Index. For the 10-year period ended February 29, 2012, the group had an annualized gain of 4.7%, while the Russell 3000 Index reported an annualized gain of 4.8%. For five years and three years, the group had gains of 4.7% and 20.0%, respectively, while the Index reported increases of 1.8% and 26.5%. During the one-year period ended February 29, 2012, the Health objective group reported a return of 11.7%, compared with 4.4% for the Russell 3000 Index. The group has a better-than-average risk Rank of 2, indicating that funds in this group might appeal to many investors, including those that are risk-conscious. 

Year to date through February 29, 2012, the Health objective group slightly underperformed the Russell 3000 Index. It reported an increase of 8.1% compared with a gain of 9.5% for the Index.

One fund with very good year-to-date return through February 29, 2012 is Rydex Biotechnology A Fund (RYBOX). This fund’s objective is capital appreciation. 

The fund invests at least 80% of its assets in companies that are involved in the biotechnology industry, including those conducting research and development, genetic or other biological engineering, and the design, manufacture, or sale of related biotechnology products.

As of February 29, 2012, the fund was more than 84% invested in the common stocks of biotechnology companies, with the balance in pharmaceuticals and cash. As of the same date, the top 10 stocks in its portfolio accounted for about 57% of assets. Its top holding as of February 29th was Amgen (AMGN), accounting for about 10% of assets.  

Another fund with a relatively high year-to-date return through February 29, 2012 is Fidelity Select Biotechnology Fund (FBIOX). This fund’s investment objective is capital appreciation.

Approximately 80% of the fund’s assets are normally invested in securities of companies principally engaged in the research, development, manufacture, and distribution of various biotechnological products, services, and processes. The fund may invest in domestic and foreign issuers. The fund managers use fundamental analysis to select issues. Industry position is also an important criteria, along with market and economic conditions.

As of February 29, 2012, the fund was more than 67% invested in the common stocks of biotechnology companies, with the balance in pharmaceuticals, healthcare products, and cash. As of the same date, the top 10 stocks in its portfolio accounted for about 46% of assets. Its top holding as of February 29th was Gilead Sciences (GILD), accounting for about 9% of assets.

A third fund with very good year-to-date return is Franklin Biotechnology Discovery Fund A (FBDIX). The fund’s holdings may include genomics, genetic engineering, and gene therapy. It also invests in biotechnology companies that cater to healthcare, pharmaceuticals, and agriculture markets. The fund further defines a biotechnology company as one that has at least 50% of its earnings derived from biotechnology activities, or at least 50% of its assets devoted to such activities based on the company’s most recent fiscal year. 

Under normal conditions, the fund will invest more of its assets in U.S. securities than in those of any other country.  It sometimes takes a temporary defensive position, such as holding a higher-than-normal percentage of assets in cash, and is allowed to use derivatives as a way of enhancing its pursuit of long-term capital appreciation. 

As of December 31, 2011, the fund was more than 56% invested in the common stocks of  biotechnology companies, with the balance in pharmaceuticals, healthcare products, and cash. As of the same date, the top 10 stocks in its portfolio accounted for about 48% of assets. Its top holdings as of December 31st was Gilead Sciences and Celgene Corp. (CELG), each accounting for about 8% of assets.

 In the table below, we have listed 10 top-performing funds through February 29, 2012 that we follow in our Fund Advisor database.

10 Top Health Funds Performance

 

Fund Name

Ticker

% Year-to-Date

Total Return

% 1 Month

Total

Return

% 3

Month

Total

Return

% 6 Month

Total

Return

% 5 Year

Total

Return

Annualized

Rydex Biotechnology A

RYBOX

15.06

0.37

17.65

22.95

9.94

Fidelity Advisors Biotechnology A

FBTAX

13.89

1.09

17.44

25.40

8.53

  

T. Rowe Price Health Sciences

PRHSX

13.65

3.29

14.85

17.58

9.84

Fidelity Select Biotechnology

FBIOX

13.60

0.91

17.35

25.10

8.92

Franklin Biotechnology Discovery A

FBDIX

12.94

0.41

14.29

22.77

7.18

Prudential Jennison Health Sciences A

PHLAX

12.09

3.74

14.12

19.60

8.88

Fidelity Select Medical Delivery

FSHCX

11.87

4.91

10.92

  

14.35

5.78

  

Manning & Napier Life Sciences

EXLSX

11.23

2.18

9.74

7.40

3.64

Delaware Healthcare A

DLHAX

11.23

2.41

12.80

9.70

 

Fidelity Select Medical Equipment & Systems

FSMEX

11.19

2.34

11.49

4.09

7.12

  

Health Objective Group

  

8.09

1.65

10.02

10.84

4.74