Health: the market for mutual funds

Related tags Health care Medicine

Mutual funds investing in health and biotechnology stocks have
provided little shelter from the bear market this year. Managers of
these funds say an aging population underpins demand for health
care products and services and the long term outlook is good,
despite a host of problems that include competition big
pharmaceutical houses face from generics when their major products
lose patent protection.

Mutual funds investing in health and biotechnology stocks have provided little shelter from the bear market this year.

Still, managers of these funds say an aging population underpins demand for health care products and services and the long term outlook is good, despite a host of problems that include competition big pharmaceutical houses face from generics when their major products lose patent protection.

According to fund research and data firm Lipper, the average health/biotechnology fund is down 27.7 per cent for the year-to-date through 25 August. While telecommunications fund and science & technology funds are down more than 40 per cent, the average diversified stock fund is down 19.5 per cent in the period.

"Pharmaceutical stocks continue to suffer from a flood of generic products,"​ said Geri Hom, manager of the Schwab Health Care Focus Fund. She notes that the health care sector consists of many components, such as the big pharmaceutical stocks traditionally viewed as defensive plays in a poor economy, or biotech stocks, which are seen as more aggressive investments.

"Looking ahead, probably the ultimate defensive sector is going to be hospitals and HMOs,"​ Hom said. "Recent actions by Congress mean that reimbursements will not be lowered. As baby boomers age it is a sector that cannot be ignored."

Humana, one of the largest US managed care companies, has helped boost the performance of Hom's portfolio. Since Humana reported a 19 per cent increase in quarterly profit in late July, the stock has gained about 7 per cent.

Taking a different view on the subsector is Jeff Herrmann, one of the managers of the Exeter Life Since Series Fund.

"We're staying away from the health care services area such as HMOs and hospitals,"​ he said. "We think those stocks are overvalued and ripe for some disappointments on the earnings front."

Herrmann, senior analyst with Manning & Napier Advisors said as health maintenance organisations seek to raise premiums in the 10 per cent to 15 per cent range, employers are balking.

The Schwab Health Care Focus and the Exeter Life Sciences Series funds are each up about 4 per cent in the four weeks ended 29 August which puts them among the top performers in the period. The rankings exclude funds with fewer than $10 million in assets.

In addition to a number of major pharmaceutical holdings, the Exeter Life Sciences Series includes companies that make life sciences research equipment, otherwise known as life sciences tools. Examples include Millipore and Applied Biosystems. The tools help improve the research effort and increase the ability to discover new compounds.

Among the larger holdings in Exeter Life Sciences Series is Boston Scientific, one of several companies that make the tiny stents that are inserted into clogged arteries. Boston Scientific and several competitors are vying to be first in the US market with an advanced type of stent that uses a special coating to inhibit re-clogging. Herrmann and his colleagues note the devices are a huge and growing market, with worldwide sales expected to increase from $2.5 billion currently to $8 billion by the end of the decade.

The Rydex Health Care Fund is another top performer in the category over the past month, with help from stocks like Cardinal Health. Cardinal, a leading drug wholesaler, has seen its shares rise about 16 per cent since it reported an increase in quarterly profit of 16 per cent on 6 August.

Portfolio manager Dan Gillespie notes Cardinal has moved beyond wholesaling into areas such as consulting services and drug delivery systems.

Gillespie agrees this has been a tough year for major pharmaceutical stocks and biotechs. In the case of biotechs, he believes the pace of new drug approvals has not met expectations. Part of the problem there, he said, is that the US Food and Drug Administration continues to be headed by an interim leader.

"The absence of an FDA commissioner is slowing down the drug approval process," he said.

One trend that is expected to help the stocks is mergers and acquisitions activity.

"I think consolidation is going to be necessary in this environment,"​ Hom said.

Industry giant Pfizer, currently in the process of acquiring Pharmacia, is the largest holding in Gillespie's fund.

"Pfizer is definitely the best-run health care company in the country,"​ Gillespie added.

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