Ivan Martchev, editor of Vital Resource Investor, says T. Rowe Price’s health care fund has outperformed many of its peers and can profit even more from the health care boom and the graying of America.

The graying of America is one of the most often advertised demographic trends in the stock market. The longer people live and the more money they have, the more they spend on health care as they grow older.

So far, it’s been working. Since the all-time high in the Standard & Poor’s 500 in 2000, the most important benchmark index has returned 3%, including dividends reinvested. In comparison, T. Rowe Price Health Sciences Fund (PRHSX) has returned 76%, a spectacular out performance. The fund has beaten the S&P 500 in five of those seven years. So far, the conclusion that you’re better off with health care than the overall market is easy to make.

The demographics are impressive, but the risk is political in this case. It’s highly unlikely that anything major will happen on the health care front in the next two years before the presidential election, even with a Democratic Congress. But should a Democrat win the presidential elections in 2008, health care stocks and health care funds will have a difficult time, just as they did in 1993-94.

We don’t expect political issues to arise until late 2008. Until then, it’s back to stock picking for T. Rowe Price Health Science managers Dr. Kris Jenner and Laurie Bertner. Their picks have been good, but you need to keep in mind that this fund has a little more biotechnology exposure than the average health care fund, even though those biotechs have evolved into large and much more stable companies than the start-ups they were just ten years ago.

T. Rowe Price Health Science has a big position in Gilead, Cephalon, Genentech and Amgen, all leading biotechnology names with strong pipelines. The fund also has a significant position in Swiss pharmaceutical giant Roche Holdings, which became well known for its successful drug treatment of avian flu. Roche also owns 55.8% Genentech, so the fund implicitly has a much larger position in this leading biotech than appears at first glance.

Other notable portfolio positions are with HMOs United Health and WellPoint. The former found itself in serious hot water last year with an options pricing scandal that cost the old CEO his job and contributed to the fund’s underperformance last year against the S&P 500.

Because of the faster growth of the fund’s top holdings, its volatility is higher than the average health care fund that invests in the Johnson & Johnsons of the world. Yet, the fund’s growth allows it to beat better than 80% of its peers, [with annualized returns of 2.4% for one year, 10% for three years and 8.8% for the last five years].

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