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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 good performer relative to the broader market, as measured by the Russell 3000 Index.  For the 10-year period ended June 30, 2012, the group had an annualized gain of 7.2%, while the Index reported an annualized gain of 5.8%.  Looking at the past five years and three years, the group had gains of 5.0% and 16.0%, respectively, while the Index reported increases of 0.4% and 16.7%. During the one-year period ended June 30, 2012, the Health objective group reported a return of 6.6%, compared with 3.8% 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. 

Year to date through June 30, 2012, the Health objective group outperformed its benchmark, reporting an increase of 14.0% compared to a gain of 9.3% for the Russell 3000 Index.

One fund with a relatively high year-to-date return through June 30, 2012 is Rydex Biotechnology Fund A (RYBOX). This fund provides capital appreciation by investing in companies involved in research and development, genetic or other biological engineering, and in the design, manufacture, or sale of related biotechnology products or services.

The fund will invest in the securities of biotechnology companies with small to mid-sized market caps. Biotechnology outfits are engaged in the research, development, and manufacture of various biotechnological products, services, and processes; manufacture and/or distribute biotechnological and biomedical products, including devices and instruments; provide or benefit significantly from scientific and technological advances in biotechnology. The fund may also purchase American Depositary Receipts to gain exposure to foreign biotechnology companies and U.S. government securities.

 The fund invests in the securities of a limited number of issuers conducting business in the biotechnology sector and therefore may be concentrated in an industry or group of industries within the biotechnology sector. The fund is non-diversified and, therefore, may invest a greater percentage of its assets in a particular issuer in comparison to a diversified fund.

Another fund with very good year-to-date return is T. Rowe Price Health Services Fund (PRHSX). This fund is an aggressive equity fund seeking long-term capital growth through investments in companies expected to benefit from changes in the health care, medicine, or life sciences fields.

The fund will normally invest at least 80% of its net assets (including any borrowings for investment purposes) in the common stocks of companies engaged in the research, development, production, or distribution of products or services related to health care, medicine, or the life sciences (collectively termed “health sciences”).

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, health care services companies, medical products and devices providers, and biotechnology firms. Its allocation among these four areas varies depending on the relative potential seeen 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.

In pursuing its investment objective, the fund has the discretion to deviate from its normal investment criteria, as previously described, and purchase securities that the fund’s management believes will provide an opportunity for substantial appreciation.


A third fund with a very good return through June 30, 2012 is Janus Global Life Sciences Fund A (JFNAX). This fund’s objective is long term growth of capital. 

It invests its net assets in securities of companies that the portfolio manager believes have a life science orientation. Generally speaking, the “life sciences” relate to maintaining or improving quality of life. These companies are generally engaged in research, development, production, or distribution of products or services related to health and personal care, medicine, or pharmaceuticals.

The fund normally invests in issuers from several different countries, which may include the United States. Management may, under unusual circumstances, invest in a single country. The fund may have significant exposure to emerging markets. Management may also invest in U.S. and foreign debt securities.

Management applies a “bottom up” approach in choosing investments. In other words, it looks at companies one at a time to determine if a company is an attractive investment opportunity and if it is consistent with the fund’s investment policies. The fund may invest its assets in derivatives, which are instruments that have a value derived from or directly linked to an underlying asset, such as equity securities, bonds, commodities, currencies, interest rates, or market indices, as substitutes for securities in which it invests. Management may invest in derivative instruments (by taking long and/or short positions) for different purposes, including hedging (to offset risks associated with an investment, currency exposure, or market conditions) and to earn income and enhance returns. The fund may lend portfolio securities on a short-term or long-term basis, in an amount equal to up to 1/3 of its total assets as determined at the time of the loan origination.


In the table below, we have listed 10 top-performing funds through June 30, 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

21.62

-1.25

5.70

24.35

9.94

Fidelity Adv Biotechnology A

FBTAX

20.05

-0.37

5.41

23.79

8.62

  

Fidelity Select Biotechnology

FBIOX

19.20

-0.33

4.93

23.14

8.88

Prudential Jennison Health Science Fund A

PHLAX

16.18

-1.05

3.64

  

18.28

8.57

  

JHT Health Sciences Trust Ser. I

JEHSX

15.78

-3.49

1.76

16.95

7.66

T. Rowe Price Health Sciences Fund

PRHSX

15.74

-3.40

1.84

16.96

8.36

VALIC Co 1 Health Sciences Fund

VCHSX

15.69

-3.52

1.69

16.99

3.24

  

Janus Global Life Sciences Fund A

JFNAX

11.00

-4.38

0.62

12.18

  

Manning & Napier Life Sciences Fund

EXLSX

10.96

-5.74

-0.25

9.47

3.44

Hartford Healthcare Fund A

HGHAX

10.29

-3.42

1.36

11.81

2.22

Health Objective Group

  

8.12

-3.76

0.03

10.05

3.18

  

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