Health-care investment funds are ailing, but the cure may not be far off


June 21, 1992|By WERNER RENBERG | WERNER RENBERG,Lipper Analytical Services, Standard & Poor's, funds1992 Werner Renberg

What a difference a few months can make!

At the end of 1991, health/biotechnology funds were riding high, having achieved an average total return of 74.3 percent for the year, according to Lipper Analytical Services.

Oppenheimer Global Bio-Tech Fund had led the group with a phenomenal 121 percent return, while even the year's laggard, Vanguard's Health Care Portfolio, had topped 46 percent, far ahead of the 30.5 percent return for the Standard & Poor's 500 Index.

Now, with the broad stock market, as measured by the S&P 500, essentially where it was when 1992 began, the health-fund average is off more than 16 percent. The Vanguard fund, with a negative return of around 10 percent, leads the pack while the Oppenheimer fund, down more than 28 percent, brings up the rear.

Why has the group performed so poorly? How long will this go on?

If you're invested in a health fund, should you stay with it?

If you're not, should you think about doing so?

Talk to health-fund portfolio managers and they'll tell you that their below-average performance this year, after a few years of above-average performance, results primarily from four factors:

1. Investors' selling health-care stocks to realize capital gains after their steep rise and putting the money into cyclical stocks to benefit from economic recovery.

2. Disappointing earnings reported by some health-care companies.

3. Downward revision of future earnings estimates because of delays in bringing new products to market and pricing restraint by pharmaceutical companies that have major drugs whose patents are going to expire soon and that want to avoid political criticism.

4. The presidential election campaign's focus on ways to arrest the rise in health-care costs, evoking visions of legislation and regulations that could affect the profitability of health-care companies and physicians.

"It's a factor that permeates the entire industry," says Edward P. Owens of Wellington Management Co., portfolio manager of Vanguard Health Care.

How much these and other developments affected the funds in the group has depended on the composition of their portfolios. Their investment policies are not all the same, even if all have the same investment objective of capital appreciation.

Most of them diversify their investments across the spectrum of health-care industry sectors, such as pharmaceuticals, biotechnology, health-care facilities, equipment and supplies. Some invest significantly in foreign companies, adding currency risk to the risk of concentration in one industry.

Two, the Oppenheimer fund and Fidelity Select Biotechnology Portfolio, are concentrated in biotechnology stocks. Another, Fidelity Select Medical Delivery Portfolio, is concentrated in stocks of hospitals and other medical facilities management companies.

Biotech companies, large to small, tend to be the riskiest. They may spend so much on research and development for new products that they may make only small profits, if any -- and leave little room for disappointments. Kenneth Oberman, portfolio manager of the Oppenheimer fund, says only about two-thirds of the 70 companies in his portfolio are profitable.

Because major pharmaceutical companies tend to be profitable and pay good dividends, they are regarded as stable and may constitute one-third of diversified portfolios. But they, too, can experience earnings disappointments that cause their stocks to plunge.

Although none of the managers can know for sure, they tend to feel that the worst of the slowdown is behind them.

Though exuberant about the long-term outlook, they seem cautious when estimating how soon health-care stocks -- and their funds -- are likely to resume rapid growth. Cheryl Alexander, portfolio manager of Putnam Health Sciences Trust, says health-care stock earnings per share are likely to grow more slowly than the market in 1992 and about the same as the market in 1993.

"The next two to three years are going to be dullish," Mr. Oberman says of biotech stocks. And he explains: "It's going to be a couple of years before we get major products in" the advanced phase of the approval process.

None doubts that health-care stocks will resume their growth. The strong basic case for investing in them -- the great and growing demand for health-care services and products, partly because of the aging of our population -- has not changed.

Health/biotechnology funds

(Ranked by five-year return; periods ending March 31; year-to-date through June 11; excludes funds with net assets of less than $25 million as of March 31.)

.. .. .. .. .. .. .. .. Annual rate of return.. .. ..Year.. .. ..12

.. .. .. .. .. .. .. .. 10.. .. .. 5.. .. ..1.. .. .. .to.. .. .mo.

Fund.. .. .. .. .. ..years.. ..years.. ..year.. .. ..yield

-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --

Financial Funds:

Health (NL).. .. .. .. ..*.. ..26.1%.. .28.1%.. ..(20.7%).. .. 0.3%

-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --

Fidelity Sel.:

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