Healthcare Fund Favorites

05/07/2004 12:00 am EST

Focus:

Sheldon Jacobs

Author, Investing Without Wall Street, Five Essentials for Financial Freedom

"Though we tend to favor diversified funds that invest across many industries, select funds that emphasize healthcare stocks should be able to outperform the broad market over the long run," says Sheldon Jacobs, who has been following no-load funds for 35 years.

"The industry backdrop for healthcare funds features several positives: the aging of the American population (and that of Japan and other developed nations); barriers to entry, including patent protection and scientific expertise; the many serious diseases and conditions in need of better treatments; and financial strength among the sector's largest companies. The main negative for the sector generally is pressure from Washington and the states on healthcare companies to lower prices for products and services. Select drug, biotech, and medical-device providers also face imminent patent expirations combined with a paucity of potential new treatments. We believe the positives outweigh the negatives.

"Among no-load funds, the long-term top performer has been Vanguard Health Care (VGHCX), managed by Ed Owens since its 1984 inception. This recommended fund is the conservative, most diversified option of the healthcare fund group. Owen divides the fund’s assets among all the major areas, including pharmaceuticals, biotech, medical services, supplies/devices, and international. A value manager in a growth industry, he favors stocks that appear most attractively priced within their sectors and shades the portfolio toward the most out-of-favor areas. The fund benefits from extraordinarily low expenses (its expense ratio and commission costs per fund share are minuscule), and over the past ten years its 20.7% annualized gain is the highest of any healthcare fund. Its main negative is the $25,000 minimum to invest. Ordinarily, we’d say that’s too much for most investors to devote to a specialty fund, but this fund’s low volatility compared to its peers and even the broad market qualifies it for consideration as a core holding.

"The more aggressive healthcare fund we favor is T. Rowe Price Health Sciences (PRHSX). Managed since early 2000 by Kris Jenner, a former surgery resident at Johns Hopkins Hospital, the fund has ranked fourth among the healthcare funds we track for the 12 months ended February. It outperformed Vanguard Health Care in the period because it is more aggressive and less diversified–though certainly not among the riskiest healthcare funds. The best performing healthcare stocks over the long run have tended to be the producers of drugs and other treatments (as opposed to healthcare services or distributors) so that’s where Jenner looks first. Biotech recently accounted for 38% of the fund’s assets. Though the fund contains some large, growing companies for ballast and moderate growth, Jenner tends to favor small and midsize companies whose products offer substantial advantages over current treatments in important areas. He especially likes companies whose products may cure diseases altogether or at least ease pain and suffering dramatically. The fund’s expense are moderate and its investment minimum is only $2,500, or $1,000 within an IRA."

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