Tread lightly with volatile health stocks



Remembering that some money managers have done well b investing in stocks of companies when "nobody" wanted them, you may be considering a mutual fund concentrated in health care stocks, which have been hammered for more than a year.

Is this a good time to go "bottom fishing?" Or, since the Clinton health care reform program has yet to be submitted, is it too early? Following their slight bounce of recent weeks, are these stocks -- and shares of funds that own them -- likely to tumble again if detailed proposals renew concerns about industry profits?

Managers of leading health/biotechnology funds, not surprisingly, remain confident in the industry. Why?

* No one knows how the Clinton program will be received by the stock market, but what really matters is how the program will be treated by Congress. We may not know that -- and the market's reaction to actual legislation -- for a year.

* They expect the winners to be companies whose products or services help to hold down health care costs, and those that can prosper without heavy reliance on price increases. They've been buying such stocks as prices fell to attractive levels.

* Given the commitment of public policy makers to assure adequate health care for all Americans and the health care industry's uninterrupted introduction of new products and services, industry sales should grow significantly.

* Unless the industry's profit margins -- that is, the pennies of profits per sales dollar -- are severely affected by price controls, increased sales revenues should generate adequate returns on capital.

Even if all this sounds reasonable, a health/biotechnology fund is not necessarily suitable for you, however. You should consider one only if you could hold it for several years, tolerate its probable volatility and limit your investment to a portion of your portfolio. Moreover, you should not look to it for income; these funds pay no or low dividends.

To be sure, health/biotechnology funds produced total returns averaging 18.6 percent annually for the five years that ended March 31, according to Lipper Analytical Services. That's well above the 15.6 percent and 15.1 percent rates of the Standard & Poor's 500 and Health Care Composite Indexes, respectively.

But this figure masks high volatility; the group's average return ranged from 74.3 percent in 1991 to a negative 8.3 percent in 1992.

That decline resulted from a correction of stock prices that had been bid too high in relation to companies' earnings and from investors' shifts to cyclical stocks. It continued through the first quarter of 1993 because of speculation about the Clinton package.

Among the seven oldest funds in the Lipper group, the slump in health care stocks had the least impact on the conservatively managed Vanguard and Putnam entries.

Edward P. Owens of Wellington Management Co., who runs the Vanguard Health Care Portfolio, devotes 30 to 35 percent of its assets to core positions in large drug companies and 15 percent to 20 percent each to medical products, hospitals and other services, and specialty drugs.

Owens has 15 percent in foreign stocks. "It has helped a lot," he says, adding: "The regulatory climate is better overseas."

Cheryl Alexander, manager of Putnam Health Sciences Trust, took advantage last year of the fund's policy provision that permits her to invest up to 20 percent of its assets in industries outside health care. She made timely purchases of companies such as Disney and CBS.

Recently, she has been selling nonhealth care holdings and replacing them with large drug companies and others.

Another widely diversified fund, John Kaweske's Financial Strategic Health Sciences Portfolio, performed poorly in the last year -- primarily, he explains, because of a high weighting in biotechnology stocks. A large stake in Synergen proved costly when its stock plummeted after a new drug's disappointing clinical trials. Kaweske cut his biotech holdings but recently raised them again.

Karen Firestone, who manages Fidelity's Select Biotechnology Portfolio, says she also feels more positive about the outlook. She has used the recent period to add to positions in stocks she really likes -- stocks that are "liquid and well capitalized" but may not start to report profits for six or seven years.

Her favorite: Chiron, which has "a pipeline full of products."

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