Many Healthy Returns

One out of every five dollars spent in the United States in 2015 will be spent in doctors’ offices, hospitals, and pharmacies. Not surprisingly, investors eyeing money-making opportunities should take a look at healthcare. For mutual fund investors who want to put an extra dose of healthcare in their portfolios, fund-tracker Morningstar reports that 62 funds specialize in this sector. Moreover, performance has been solid, with annualized returns of more than 10.4% a year for the past 10 years, through the first quarter of 2006.

Among those dozens of funds are significant differences. For example, some specialize in big pharmaceuticals, including drug companies such as Pfizer Inc and Johnson & Johnson. The big pharmas, however, have recently faced some big problems. “Their pipelines of new drugs are drying up,” says Joe Pantginis, vice president of equity research for Canaccord Adams, a Boston-based brokerage and investment banking firm. “Some large pharmaceutical companies are facing patent expirations.” When patents expire, drug companies can produce generic versions and sell prescription pharmaceuticals for a fraction of the name-brand price. That may be good news for consumers, but it depresses profits for companies and their shareholders.

Other healthcare mutual funds specialize in biotechnology stocks. These companies practice the manipulation of the DNA molecules of living organisms to find new drugs. Amgen Inc. and Genentech Inc. are among the biotech leaders that have become investors’ favorites. “Biotechnology companies now have real products on the market,” says Pantginis. Because biotech companies are young, with products that are hard to duplicate, they don’t have the same patent expiration concerns as big pharmas. This bodes well for the prices of biotech stocks. But investing in biotech can still be risky business. Many of these firms are small and dependent on a few developing products. Thus, disappointing results can drive down prices.

There are also healthcare funds that own hospital companies, makers of medical devices, HMOs, distributors of medical supplies, and so on. Greater diversification means investors may not get the best annual returns but they also can avoid the sharpest drops.

It’s important that you know what’s in a healthcare fund before you invest. “We have been using Vanguard Health Care,” says Mark Wilson, vice president of The Tarbox Group, a wealth management firm in Newport Beach, California. This diversified fund, which has returned nearly 17% a year, is closed to new investors.

Richard Moran of Moran, Kimura & Heising, a financial services firm in Torrance, California, favors the Eaton Vance Worldwide Health Sciences fund. “We like the mix between big pharma and biotech stocks,” says Moran. “In addition, it’s one of the few healthcare funds that has a significant percentage of its assets outside the U.S., which may help returns.” Recently, top holdings included Novartis AG, a Swiss-based pharmaceuticals company, and Japan’s Takeda Pharmaceutical Co. Ltd.

Wilson’s firm is also evaluating Schwab Health Care Fund, which uses a strictly by-the-numbers method of picking stocks and winds up with lesser-known names. These include Express Scripts Inc., a provider of prescription drug administration, as well