A Health Fund with Healthy Returns

03/15/2010 10:44 am EST

Focus: FUNDS

Russel Kinnel

Editor, Morningstar FundInvestor

Russel Kinnel, editor of Morningstar FundInvestor, and analyst Christopher Davis, say one health care fund outperforms its peers by being smaller and breaking from the herd.

Capable management and a distinctive strategy make T. Rowe Price Health Sciences (PRHSX) a top notch choice.

Kris Jenner is a veteran health-care investor. January 2010 marked the start of his tenth year at the helm of this fund. Jenner is a physician by training. That experience helps him assess whether treatments can gain traction in the medical community.

Over the past decade, Jenner’s strategy has slowly evolved. Early in his tenure, he focused nearly exclusively on pharmaceutical and biotechnology stocks, particularly the latter. That tack made the fund considerably more volatile than its rivals, most of whom employed more diversified approaches with much lighter stakes in the traditionally topsy-turvy biotech industry.

By the mid-2000s, Jenner’s strategy grew more risk-conscious. He began spreading his bets more broadly across the health-care sector. His broader portfolio still stands out, though. The fund’s pharmaceutical stake remains relatively light, for instance, and its health-services exposure above average.

All along, though, Jenner hasn’t parted from his preference for smaller names, which he says have more growth potential than the sector’s behemoths. The fund’s $7.6-bllion average market capitalization is less than half the group’s average.

While heavyweights Merck (NYSE: MRK) and Roche (OTC: RHHBY) are top holdings, other bellwethers, such as Pfizer (NYSE: PFE) and Johnson & Johnson (NYSE: JNJ), are conspicuously absent. Instead, mid-cap specialty pharmaceutical and biotech drug makers play bigger roles than at most competitors.

Jenner has tended to stick with his favorites for years. Gilead Sciences (Nasdaq: GILD), which Jenner has liked for its innovative HIV-drug franchise, has been a top-ten holding since September 2002. He likes to buy when prices are low, but he’ll hang on even if they get relatively pricey so long as their prospects justify it.

The fund has been a winner, with long-term returns ranking in its category’s top quartile or better. Jenner’s smaller-cap bent can lead to steep losses in the short term, though. That was the case in the 2008 bear market, when the fund fell 28%. However, in 2009’s rally, it rose 32%, a top-decile showing in the health-care category.

At 0.86% annually, the fund’s expense ratio lands in the lowest quintile of all no-load sector funds.

The fund is a better fit in a portfolio than many of its peers. By trafficking lightly in many of the sector’s better-known names, the fund is less likely to overlap with investors’ other holdings. That attraction, along with skilled management, excellent long-term returns, and moderate costs, makes this offering one of the best ways to invest in health-care stocks.

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