Americans are living longer than ever. To meet the needs of an aging population, the health industry has grown rapidly--creating opportunities for savvy investors.
At the end of 1994, there were only 18 health and biotechnology mutual funds, according to Lipper Analytical Services. Today, there are 48 such funds with assets totalling more than $16.4 billion.
One of the top-performing health and biotech funds has been Invesco's Strategic Health Sciences Portfolio. Since its inception in 1984, the fund's average total annual return has been 23.9 percent. Through June 16 of this year, it was up 18.69 percent, outpacing the return of the S&P 500.
While performance in health and biotech funds has always been volatile--in 1994, for instance, Invesco's fund was up 0.94 percent and in 1995, up 58.89 percent--jumpy numbers are a natural part of sector-fund investing and no reason for long-term investors to overlook them.
John Schroer has been manager of the Strategic Health Sciences Portfolio since October 1997 and was the fund's co-portfolio manager for three years prior. "We're traditional growth investors, not momentum investors," says Schroer. "We look for high-quality, long-term earnings growth companies. We try to identify industries that achieve higher than average returns, and that brought us to the health-care and pharmaceutical industries."
Warner-Lambert Co., one of the fund's core holdings, is a good example of the kind of company Schroer likes to invest in. "I looked at Warner-Lambert about three years ago when they were in the process of launching two new drugs [Lipitor and Rezulin]," explains Schroer. "Warner-Lambert had been underperforming for about five to seven years. As a result, it traded at a discount.
"Because those two drugs were clinically superior to what was already on the market, I figured if they averaged between $5 million and $7 million dollars [in annual sales] apiece, Warner's growth rate would accelerate, and it would become a great investment." Schroer's call was right on.
While Invesco's Strategic Health Sciences Portfolio is considered a mid-cap fund, its approximately 70 stocks include some large-cap companies like American Home Products, Bristol-Meyers Squibb and Merck & Co.
Another company in the portfolio is medical device manufacturer Guidant, maker of pacemakers and defibrillators. "We own Guidant not necessarily for the earnings that are going to be reported next quarter or the following one," says Schroer, "but for what the company is going to do over the next five years. It's using its technology to address congestive heart failure (CHF), and millions of people have CHF."
Health and biotech fund investing isn't for the unadventurous. It's for believers in the health, science and biotech fields who are willing to take risks, don't mind a bumpy ride and know a little bit of medicine can go a long way.
Dian Vujovich is a nationally syndicated mutual fund columnist and author of Straight Talk About Mutual Funds (McGraw-Hill), Straight Talk About Investing for Your Retirement (McGraw-Hill), and 10-Minute Guide to Stocks (Macmillan).