From the August 2006 issue of Investment Advisor • Subscribe!

Health Care Funds Tired and Sluggish

The health care sector encompasses a broad and diverse group of companies--from high-risk, fast-growth biotech stocks to solid, blue-chip drugmakers, long the darling of conservative defensive investors. Nonetheless, big pharma names dominate most health care funds and these businesses are beset with problems, including a slowing pipeline of new drugs and the scourge of patent expirations. Plus, last year's recall of the blockbuster painkiller Vioxx by Merck Co. Inc. (MRK) sent shivers throughout the sector. As such, health care funds have largely underperformed the past five years as the big drug makers have lagged.

However, as U.S. markets have entered a period of rising interest rates and volatile markets, health care stocks may rebound, owing to their current attractive valuations and their traditional popularity as safe, defensive investments.

One of the best longer-term performers in this area, the $561-million Schwab Health Care Fund (SWHFX) is a relatively concentrated portfolio of 48 stocks.

As of April 30, the fund's ten largest holdings accounted for 45.2% of total assets, including significant positions in top picks Applied Biosystems Group-Applera Corp. (ABI), King Pharmaceu-ticals (KG), Pfizer (PFE), Merck, Sierra Health Services Inc. (SIE), Becton Dickinson Co. (BDX) and McKesson Corp. (MCK).

Lead manager Jeff Mortimer has about 59.5% of the fund's assets in health care equipment & services, with the remaining 40.5% in pharmaceuticals and biotechnology names.

A recent outperformer, the $1.56-billion T. Rowe Price Health Sciences Fund (PRHSX), has 43% of its assets invested in biotech stocks, making it the largest individual sub-sector. Portolio manager Kris Jenner includes such biotech stalwarts as Amgen (AMGN), Genentech Inc. (DNA), ImClone Systems (IMCL) and Gilead Sciences (GILD) among the top 10 holdings.

The fund also has 23.7% of its assets in health services stocks and 19.7% in pharmaceuticals.--Palash R. Ghosh

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