Schwab Health: For Risk-Averse Investors

08/05/2014 9:00 am EST


Genia Turanova

Editor, Leeb Income Performance

This fund offers broad exposure to healthcare at below-average risk; that's because, compared to the sector's typical fund, it tilts heavily to larger-cap drug companies and less to small-caps and biotechs, explains Genia Turanova in The Complete Investor.

The three largest positions at Schwab Health Care Fund (SWHFX) are Pfizer (PFE), Johnson & Johnson (JNJ), and Merck (MRK), which together account for about 18% of total assets.

One result is that in terms of valuations, the Schwab fund is less expensive than most of its peers. The average p/e of its holdings is 18.0 versus 24.5 for the category. Price to book is 2.9 versus 4.8 for peer funds, while price to sales is 2.1 for Schwab, 3.6 for its peers.

These more modest valuations have paid off in pickup in Schwab's relative shorter-term performance, leading to improvement in its 10-year and 5-year records. Over the past 10-year period, the fund has returned 12% on an annualized basis.

While relatively heavy in larger-cap stocks, the fund still offers plenty of exposure to smaller healthcare companies.

Its current allocations are: 8% mid-caps (compared to 17.5% for peers), 8% small-caps (versus 15% for its peers), and 2.8% micro-caps (versus more than 3% for peer funds). About 1% is in cash with the rest in large- and mega-cap stocks.

In selecting stocks, Schwab Health Care fund draws on the Schwab Equity Ratings system, which assesses fundamentals, valuations, momentum, and risk to project 12-month performance for some 3,000 of the largest US stocks.

Morningstar gives four stars to the fund and assesses its risk as below average. In all, the fund provides sector exposure at an attractive price and below-average risk, making it a good choose for risk-averse investors.

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