Health care stocks buck 3rd-quarter trend Their long-term value makes them attractive

Mutual funds

October 25, 1998|By Bill Barnhart | Bill Barnhart,CHICAGO TRIBUNE

A noteworthy element of otherwise disappointing third-quarter mutual fund results was the relatively strong performance of funds focused on health care stocks.

Four of the top 10 stock fund performers in a survey of five-year performance by Lipper Analytics were health care sector funds: Fidelity Select Health Care Portfolio, Vanguard Specialized Portfolios-Health Care, Putnam Health Sciences A; and Invesco Strategic Health Science.

In addition, several of the 12-month and five-year leaders among diversified stock funds ranked by Morningstar held above-average concentrations in health care stocks, including Janus Twenty, PBHG Large Cap 20, Index Growth T, Spectra Fund, Vanguard Index Growth and White Oak Growth.

It is not surprising that a stock market correction that skimmed froth from an bull market would expose the intrinsic long-term value of health care investing.

Demographic and wealth trends among the major industrialized

countries plus the practical benefits of technological change make a compelling case that individuals will spend more of their time and income on health care in the years ahead.

Nobel Prize-winning Professor Robert Fogel of the University of Chicago Graduate School of Business told an audience of alumni this month: "Leisure-time activities [including lifelong learning] and health care are the growth industries of the late 20th and early 21st centuries. They will spark economic expansion during our age, just as agriculture did in the 18th and early 19th centuries and as manufacturing, transportation and utilities did in the late 19th and much of the 20th centuries."

But investing in health care stocks or health care stock funds has been anything but a slam dunk. Since the historic bull market began in the early 1980s, the sector has been in and out of favor, with wide swings in investor expectations and stock returns.

"This is a very good sector to have in your investment assets for the long term, but it's not necessarily a good entry point," said Edward Owens, manager of Vanguard's health care sector fund.

Owens, known as a conservative manager, maintains exposure to five groups of health care stocks that perform in a distinct manner but represent the entirety of equity opportunities available in the sector: major U.S. pharmaceutical companies; biotechnology companies; medical products producers; international health care stocks; and health care service

companies, including hospital operators and HMOS.

In addition to the demographic trends, scarcity value plays a role in the health care equities story, said Owens, whose 14 years as manager of the Vanguard health care fund makes him an authentic veteran in the industry.

Although health care promises to be a growing segment of gross national product, it represents only about 10 percent of stock market capitalization. That is because major chunks of health care spending -- such as Medicare and most hospitals and private physician practices -- are not publicly traded companies.

Eventually, Owens believes, health care services, including more physician practices, will enter the equity market in search of capital. But the current travails of HMOs and a shakeout in physician practice management companies suggest that day is not at hand. And it is unlikely that Medicare and Medicaid will be privatized anytime soon.

Aside from HMO companies and other service providers, political conditions for the health care industry have been "as good as it gets" for the last few years," Owens said. That is one reason why he's cautious.

Conditions will "go from being unbelievably good to being plain good, and that kind of change will bring lower stock prices, just because expectations are a big factor in how the market prices securities. I don't believe we're going to do nearly as well going forward; what I don't know is how we'll do relative to other sectors."

Owens believes there's a chance that the Food and Drug Administration's generous pace in approving new drugs will slow as drugs in the pipeline are cleared.

HMOs and other health care providers, including Medicare, have been stung by recent increases in drug costs, resulting in part from direct-to-consumer promotions.

Nonetheless, "The health care industry has more steady and more predictable growth than the other 90 percent of the stock market," Owens said.

Pub Date: 10/25/98

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