What are the best funds for investors seeking exposure to the broad healthcare sector? In Kiplinger’s Personal Finance, Nellie Huang discusses the trends impacting the sector and highlights four favorite funds.
Steven Halpern: Our guest today is Nellie Huang of Kiplinger’s Personal Finance Magazine. How are you doing today, Nellie?
Nellie Huang: I’m great, thanks.
Steven Halpern: Well, thank you for joining us. In your latest article on the healthcare sector, you point out that a revolution in the sector is underway and you highlight three important trends that are impacting the long-term growth of healthcare. The first is the government; in particular, the Affordable Care Act. Could you expand on that?
Nellie Huang: Certainly. The Affordable Care Act is just one of the trends that is the cause of pressure to hold down insurance premiums, insurers are trying to scramble—are scrambling—to diversify their revenue streams and so they’re acquiring different kinds of companies.
For instance, Humana (HUM)—the insurer—in 2013, acquired American Elder Care and that’s an in-home nursing services provider in Florida so they’re really trying to diversify their business revenue stream.
The other thing that’s happening is that, in 2009, the kind of post-2008 financial crisis law also provided incentives for doctors, hospitals, and other medical care providers to digitize their records.
It’s all about going electronic, so now you get an x-ray, your x-ray technician will email it to your doctor and any other doctor you want—and all of this seems like, yes, it should happen—but part of the reason it’s happening quickly these days is because of that 2009 act.
Steven Halpern: You also point to the scientific revolution that’s going on in the sector. Could you highlight off some of what you see there?
Nellie Huang: Much of what’s happening has to do with DNA sequencing. Thirteen years ago, the first genome was mapped and it cost about a billion dollars.
These days it takes a few days and costs just a few thousand dollars and this is enabling drug makers to basically pinpoint certain genes and then develop therapies around them, and so there’s a huge revolution in new drugs and biotechnology.
Steven Halpern: Now, as you alluded to earlier, there’s a trend towards consolidation. How important is that in your outlook for the sector?
Nellie Huang: I think it’s important because, you know, companies are trying to really hone in on what their strongest business and so, for instance, Pfizer (PFE) shed its animal health business to focus on drugs and Abbott Laboratories (ABT) split into two.
Once company focuses on drugs and the other company makes medical products. This kind of focusing is helping businesses perform better. They’re able to cut costs easier and they can really, kind of, trim down on research costs, it’s possible, that kind of thing.
|pagebreak|Steven Halpern: As for specific investments, you observed that the sector requires a lot of know-how and, as such, you recommended investors consider funds that have managers specializing in the sector and one you particularly like is Fidelity Select Health Care (FSPHX). Would you share your thoughts on that?
Nellie Huang: Yeah, this is run by Eddie Yoon and he looks for growing companies that trade at a discount to what he thinks the funds will be worth in three to four years, so it’s diversified.
He has owned some biotech but he also owns medical services companies and drug makers, so you’re getting kind of a good broad swath of the industry with that fund.
Steven Halpern: You also suggested Janus Global Life Sciences (JAGLX). What’s the story here?
Nellie Huang: I really like the way the manager, Andy Acker, divides the universe of health companies. He looks for classic growth companies like Johnson and Johnson (JNJ)—which dominates almost every market they compete in.
Then another third or so of the fund is focused on young, fast-growing companies. This might be a biotech firm and then the rest of the fund is focused on out-of-favor stocks that augment other things they cover.
Steven Halpern: A third fund that you feature also happens to be the largest of the healthcare funds and that’s Vanguard Health Care (VGHCX). What do you like about this outfit?
Nellie Huang: This is a Vanguard fund but it’s run by a manager from Wellington Management. They’re based in Boston and it’s kind of like a granddaddy of healthcare funds.
It’s low in cost. It costs just 0.35% in annual fees and it tends to be less volatile than the other ones. That may have to do with its larger size but the manager there, Jean Hynes, has been working the fund for decades and she favors promising healthcare companies trading at value prices.
They’re very careful about what they invest in and when they invest, what price they get in at, and I think they really prove that they can manage this sector well with a long track record.
Steven Halpern: Now, finally, you suggest that investors also consider the biotech sector when looking at healthcare and the specific fund you choose there is also from Fidelity and that’s Fidelity Select Biotechnology. Could you tell us about this fund?
Nellie Huang: Yeah, now, I just would caution investors that if they’re going to make a bet, specifically in this smaller kind of sub-section in the healthcare industry, that it can be quite volatile, but biotech is where the fastest growing companies are in this industry.
Fidelity Select Biotechnology (FBIOX) is probably the oldest biotech focused firm. It’s run by a guy name Rajiv Kaul. He’s been there since 2005 and he’s outpaced the iShares Nasdaq Biotechnology Index by practically one percentage point per year since he took over and that’s a pretty good track record.
Steven Halpern: Well, it’s always fascinating to hear your ideas. We really appreciate your taking the time to speak with us today.
Nellie Huang: Oh, thanks for having me. I appreciate it.
Steven Halpern: Thank you.
