It was good to be in health during 1990.
Mutual funds that focus on health-care companies ran laps around the competition during an anemic year for the stock market as a whole. The nine funds in the health group posted an average total return of nearly 20% in '90, contrasted with a loss of 3% for the Standard & Poor's 500, including dividends. It was the second consecutive year that the health sector trounced the broad market by more than 11 percentage points.
Can it happen again?
Yes, but probably not immediately. After two straight years of peppy performance (health funds rose nearly 44% in '89), the group is due for a rest. "It's unreasonable to think that 1991 will be as good as the last two years from an investment standpoint," concedes Mike Gordon, portfolio manager of Fidelity's Select Biotechnology fund in Boston. "But the long-term trend is very favorable."
Like other "sector" funds that focus on a particular industry or region, health portfolios aren't widely diversified, which makes them more risky. Fortunately, there are dozens of highly profitable companies in the health field, including those coming out with promising new products and services to meet increasing demand.
For example, one of the stock market's rising stars of 1990 was Amgen Inc., a biotech firm based in Thousand Oaks whose shares vaulted about 154% for the year, thanks to strong sales on a drug for helping kidney dialysis patients and the planned introduction of a promising new blood cell medication.
After years of above-average growth, the health-care industry now accounts for about 11.5% of the nation's gross national product, and the business appears resistant to economic downdrafts. "This area is favored, on a relative basis, during periods of slow economic growth or recession," says John Kaweske, manager of the Financial Strategic Health Sciences portfolio in Denver. That helps to explain the funds' strength during the past two years.
Add to this favorable long-term demographic patterns and you have the foundation for a vibrant industry for years to come. Today, about one of every eight Americans is 65 or older, but by the year 2030 that proportion will rise to one in five assuming current trends continue, says Kaweske. All this implies a big increase in the most important segment of the U.S. market. "About three-fourths of all the health-care people consume in their lives is consumed after age 65," he says.
Of course, the health-care industry isn't a monolith but rather a collection of businesses. The pharmaceutical group includes some of the biggest corporate names in America, such as Merck, Bristol-Myers Squibb and Pfizer. Drug manufacturers constitute core holdings of the broadly based health funds, and for good reason. Many of these blue chip firms will continue to post annual profit increases of 15% to 20% or higher at least into the mid-1990s, predicts Kaweske.
Also gaining the attention of investors are companies that provide goods and services that help contain spiraling health-care costs. This includes everything from mail-order pharmacy companies to outpatient clinics.
However, these low-cost competitors don't auger well for hospitals, some of which have priced themselves to the brink of failure because of high overhead and duplicated facilities. "Who wouldn't pay a few dollars a day for a drug that helps you avoid a hospital stay at $1,000 a day?" asks Cato Ohrn, a retired medical doctor who publishes the investment-oriented Sector Funds Newsletter in San Diego.
Then there's biotechnology, with its promise of engineering even the most stubborn of diseases into oblivion. During the early and mid-'80s, many of the fledgling companies in this field were losing money, saddled as they were by high research and development expenditures. "Now, the industry is transforming into one of commercial companies generating real sales and earnings," Gordon says.
Gordon considers biotechnology one of the more exciting groups for the long haul, but he cautions that investors need to expect volatility when buying either the stocks or the funds that hold them. Bellwether Amgen, for example, trades at a lofty price/earnings ratio of about 60, although that's down from a five-year high in which the P/E exceeded 600.
Many other health stocks trade well above market multiples--a sign that the funds might be overpriced. "This is an exciting area with lots of sizzle, but it's not for the average mutual fund investor," says Eric Kobren, editor of Fidelity Insight, a newsletter in Wellesley, Mass., that tracks Fidelity funds only.
In fact, Kobren suggests selling Fidelity's Select Biotechnology portfolio because of its big gain over the past two years. Nor does he show much enthusiasm for Select Medical Delivery, although he does recommend Select Health Care for purchase by aggressive investors.