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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 includes Franklin Biotechnology Discovery Fund (FBDIX), which focuses exclusively on companies at the forefront of the medical sector 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, but enjoy a much broader mandate to invest in healthcare across all of its subsectors, as does T. Rowe Price Health Sciences Fund (PRHSX).  These offerings 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 while others may have a more domestic focus. 

There are also funds that focus on subsectors beyond the more established biotech niche, including ProFunds Pharmaceuticals UltraSector Fund (PHPIX), a leveraged fund centered 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 be only one fund to fill the need—it’s just important to ensure that investment is managed in a way that is complementary to one’s overall 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 good performer relative to the broader market, as measured by the Russell 3000 Index.  For the 10-year period ended December 31, 2012, the group had an annualized gain of 8.5%, while the Index reported an annualized gain of 7.7%. Looking at the past five years and three years, the group had gains of 5.2% and 11.5%, respectively, while the Index reported increases of 2.0% and 11.2%. During the one-year period ended December 31, 2012, the Health objective group reported a return of 19.2%, compared with 16.4% 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-adverse. 

One fund with a relatively high year-to-date return through December 31, 2012 is Fidelity Select Biotechnology Fund (FBIOX). This fund’s investment objective is capital appreciation. To achieve its objective, the fund invests at least 80% of its assets in securities of companies principally engaged in the research, development, manufacture, and distribution of various biotechnological products, services, and processes and companies that benefit significantly from scientific and technological advances in biotechnology. As of November 30, 2012, the fund was more than 74% 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 59% of assets. Its top holding as of November 30th was Gilead Sciences (GILD), accounting for about 14% of assets.

Another fund with very good year-to-date return is T. Rowe Price Health Sciences Fund (PRHSX). This fund is an aggressive stock fund seeking long-term capital growth through investments in companies expected to benefit from changes in the healthcare, medicine, or life sciences fields. While the fund can invest in companies of any size, the majority of fund assets are expected to be invested in large- and mid-capitalization companies.

The fund defines the health sciences industry broadly and divides it into four main areas: pharmaceutical companies, healthcare services companies, medical products and devices providers, and biotechnology firms. The allocation among these four areas will vary depending on the relative potential seen within each area and the outlook for the overall health sciences sector.

In general, the fund will follow a growth investment strategy, seeking companies whose earnings are expected to grow faster than inflation and the economy in general. When stock valuations seem unusually high, however, a “value” approach, which gives preference to seemingly undervalued companies, may be emphasized.

While most assets will typically be invested in U.S. common stocks, the fund may invest in foreign stocks and options in keeping with the fund’s objectives. The fund writes call and put options primarily as a means of generating additional income. Normally, it will own the securities on which it writes these options. The premium income received by writing covered calls can help reduce but not eliminate portfolio volatility.

A third fund with a very good return through the first seven months of 2011 is Prudential Jennison Health Sciences Fund A (PHLAX). Under normal circumstances, the fund invests at least 80% of its assets in the common stock of companies that are involved in the biotechnology industry, including those in research and development, genetic or other biological engineering, and in the design, manufacture, or sale of related biotechnology products. It may not hold more than 5% of its assets in any one security.

In the table below, we have listed 10 top-performing funds through December 31, 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 Fund A

RYBOX

36.19

-1.66

-3.63

5.23

12.16

Fidelity Adv Biotechnology A

FBTAX

37.08

-0.69

-2.86

6.26

11.73

  

Fidelity Select Biotechnology

FBIOX

36.59

-0.67

-3.09

6.45

12.05

T. Rowe Price Health Sciences

PRHSX

31.93

0.73

-2.45

5.70

9.91

VALIC Company I Health Sciences

VCHSX

31.72

0.68

-2.60

5.65

6.63

Franklin Biotechnology Discovery Fund A

FBDIX

29.35

-0.55

-4.91

0.36

10.44

Prudential Jennison Health Science A

PHLAX

25.08

-1.24

-5.16

2.22

9.05

  

Manning & Napier Sciences

EXLSX

25.84

-0.76

-0.17

6.82

3.90

Putnam Global Health Care A

PHSTX

21.97

0.54

0.71

7.88

4.96

Fidelity Select Health Care

FSPHX

21.39

-0.44

-1.39

7.01

6.44

Health Objective Group

  

19.23

-0.22

-1.74

4.55

5.24

  

  At the time of this article's writing, the authors did not have positions in any of the funds mentioned.