After Financial Funds' Health Sciences Portfolio reported a total return of 59.7 percent for 1989, portfolio manager John Kaweske cautioned investors not to count on similar results soon. It was the kind of year investors might expect once every 10 years, he said.
"I was wrong," Mr. Kaweske confessed recently.
After producing a 25.8 percent return in 1990 -- a year in which the broad stock market was down -- he generated a 91.8 percent return in 1991. That enabled his fund to post the best record of all mutual funds for the last five years.
"Maybe it's twice every 10 years," he said.
His exceptional performance wasn't unique in 1991. Among eight health/biotechnology funds, returns ranged from 121.1 percent for Oppenheimer Global Bio-Tech Fund, the year's No. 1 mutual fund, to 46.3 percent for Vanguard Health Care Portfolio.
Moreover, Financial and five others ranked among the top 13 of all funds for the last five years, according to Lipper Analytical Services. Fidelity Select Health Care Portfolio, the group's oldest fund, ranked first among funds for the last 10 years.
But all that is history. If you're not in one of the funds, you may want to know whether you have missed your opportunity or could still benefit by buying into one of them.
None of the managers predicts another smashing year, but all agree that stocks of the multifaceted health care industry should continue to outperform the broad market over the long run.
Given the risks of funds concentrated in this (or any other) economic sector, however, you should not think of any one fund as the only long-term investment you'll ever need.
When considering the group, remember that three -- concentrated or primarily invested in biotechnology (the Oppenheimer fund and Fidelity Select Biotechnology Portfolio) and facilities (Fidelity Medical Delivery Portfolio) -- are even more risky than the five that are diversified across the health care industry.
And, although only the G.T. Global Health Care and Oppenheimer funds have "global" in their names to indicate they may invest some of their cash outside the United States -- and thus expose you to additional risks -- the other four diversified funds hold foreign stocks, too.
As long as you understand -- and can afford to accept -- the risks associated with these funds, you shouldn't mind their volatility if they reward you over time. Is that likely?
Oppenheimer's Kenneth Oberman, whose fund was closed to new investors in October when its net assets reached $150 million, was optimistic about biotech stocks as long-term investments -- even though some have disappointed him. "Realization of the group's potential has really just begun," he said.
Mr. Oberman based his comment partly on the rate at which the Food and Drug Administration OKs new products, thereby affecting companies' earnings and stocks. He expects "many" approvals this year and a slowdown in 1993 but "quite an explosion" starting in 1994.
Whether those products are meant for people, animals or plants, he tries to have a balance between companies with "big" products and companies with "interesting" research & development. "It's easy to make money in this business," Mr. Oberman said, "but it's also easy to lose it. You have to have diversification."
In recent weeks, he invested small sums in new issues, raising the number of stocks he holds to 65, but he'll watch and wait before adding more.
"I'll be happy to buy at higher prices," Mr. Oberman said.
Among the diversified health care funds, biotech stocks range from about 5 percent of assets for the Putnam and Vanguard portfolios to about 25 percent for Fidelity Select Health Care.
Companies such as Amgen and Synergen seem to be popular across the board.
Edward P. Owens of Wellington Management Co., who manages the Vanguard fund, looks at his 30 percent to 40 percent holding in major drug companies as his portfolio's "anchor" and potential source of cash if he has to sell to meet an unexpected flood of redemptions. He regards international stocks as the most attractive and is adding to his holdings.
Even more than before, Mr. Kaweske is emphasizing a theme that cuts across the industry: health care cost reduction. Seeking companies that provide major products or services at lower costs, he has established positions in health maintenance organizations such as Qual-Med, medical technology companies such as Medtronic, and health care service providers such as T2 Medical.
As his fund has soared to more than $1 billion, Mr. Kaweske has had to deal with a new problem: the need to find good large companies because investing in a good small company won't do much for his return.
"Fortunately, we can still find a Merck, with a $60 billion capitalization, in which I can put 5 percent of my fund," he said.
Andrew Offit, whose Fidelity Health Care Portfolio also exceeds $1 billion, shares the frustration: "It's tough when you find a small company that you have a strong conviction about and know that the impact on the fund of what you can buy is limited."