500 / 708
18
Healthcare funds are down
13
.
4%
for the year through
Oct.
31
, following a big rally in prior years. Morning-
star’s stock analysts see opportunities here: They expect
pricing power for drug and biotech companies to
remain strong, research and development to remain
productive, and mergers and acquisitions to continue
at a steady pace.
Heavy sector concentrations always come with risk.
That said, a long-term bet on the broad growth oppor-
tunities in the healthcare sector is not the same
level of risk as, say, a tactical precious-metals play (as
attractive as such a play might seem in hindsight
at the moment). We ranked Morningstar Medalists in
the M
500
by their healthcare positions and found
eight domestic-equity funds with more than a fourth
of assets staked there. All of them fall within a
growth category.
ClearBridge Aggressive Growth
SHRAX
had the
biggest stake at one third of assets. This isn’t a new
stake in this high-conviction portfolio:
Biogen Idec
BIIB
,
UnitedHealth Group
UNH
,
Allergan
AGN
, and
Amgen
AMGN
, all among the top holdings at
the end of September, were originally purchased in the
1990
s. (Although Allergan, previously Actavis,
entered the portfolio in
2014
, it did so after buying long-
time holding Forest Laboratories.) These four picks
alone made up about one fourth of assets, and the
fund’s
35%
healthcare weighting was approximately
twice that of its Russell
3000
Growth Index bench-
mark and the large-growth Morningstar Category. The
Silver-rated fund is more volatile than peers, but it has
paid off over the long term.
Four of these are Gold-rated funds run by the Primecap
team that won the Morningstar Domestic-Stock
Fund Manager of the Year accolade in
2014
and back
in
2003
:
Primecap Odyssey Growth
POGRX
(a
large-growth fund with a
33%
healthcare stake);
Van-
guard Capital Opportunity
VHCOX
(large growth,
32%
);
Primecap Odyssey Aggressive Growth
POAGX
(mid-growth,
30%
); and
Vanguard Primecap VPMCX
(large growth,
27%
). The funds are all variants of
the same patient contrarian growth strategy. The Prime-
cap team’s strategy paid off in a big way in
2014
:
Big Biotech and Pharma holdings in all the funds—
such as Biogen Idec, Amgen,
Eli Lilly
LLY
,
Roche
RHHBY
, and
Novartis
NVS
—posted strong returns for
the second-straight year. The team has long argued
that the market was underestimating the pipelines and
growth potential of these firms, and it still stands
by these picks. The Primecap approach can experience
periodic slumps, but it has produced superior long-
term results.
Bronze-rated
Amana Growth Investor
AMAGX
has
among the best
15
-year returns in the large-growth
category and it has been one of the least volatile
funds in the category, thanks to longtime manager Nick
Kaiser’s preference for stable growers and his
willingness to hold cash in tough times. This is despite
the fund’s pronounced sector tilts: It is one of a
handful of North American mutual funds that hews to
Islamic principles, which exclude essentially all fi-
nancials, as well as high-debt companies, which applies
to many real estate, telecom, energy, and utilities
names. Not surprisingly, the fund typically holds more
in technology and healthcare than its average
peer, with longtime holding Amgen at more than
4%
of assets and the biggest pick in its
26%
healthcare
stake as of Sept.
30
.
Two small-cap growth funds also made the list,
with healthcare stakes just above
25%
: Gold-rated
Brown Capital Management Small Company
BCSIX
and Silver-rated
Conestoga Small Cap
CCASX
.
(The former remains closed to the new investors,
while the latter reopened earlier this year.) While
healthcare companies are generally riskier in the small-
cap space, both funds are run by experienced
teams that emphasize quality, and their risk has been
moderate relative to the small-growth category.
The portfolios have little overlap, but
Bio-Techne
TECH
and
Abaxis
ABAX
are names in common.
K
Following the Healthcare Investors
Tracking Morningstar Analyst Ratings
|
Laura Lallos
What Are Morningstar
Analyst Ratings?
Our ratings are chosen for long-
term success. Analysts assess
a fund’s competitive advantages
by analyzing people, process,
parent, performance, and price.
They do rigorous analysis and
then submit their ratings to a
committee that vets their work
for thoroughness and consistency.